View from the Top - 5/2/2021 | Archimedes Methodologies

Navigator Intermediate Swing Strategy

The month of April lived up to its reputation as one of the strongest months of the year. I harken back to late March, when I counseled that April was likely to be strong, as we came off the 20-week cycle low. It was hard to accept that the market could go higher then, but after sputtering just a bit, it finally gripped. All in all, it was a great month.

Having said that, our swing strategy remains 100% cash, as we profitably scaled out of our positions as the month progressed. The market has made little, if any, progress since April 19th. It could be consolidating to go higher, and it almost tripped a buy signal Thursday. But as long as the market remains under the Algo trigger line (see the chart below), I am not interested in any long positions.

Friday (also the last day of April), the S&P 500 index futures closed right on the 5-day exponential moving average. If you are still in the market, the 5-day EMA can be a good stop line. You could use a violation of the 5-day EMA on a closing basis as your line in the sand.

Unless the index can poke above the Algo trigger line on the daily chart (see below), my intermediate bias remains negative, believing that we are close to an intermediate peak – if not already there.

Even if we are peaking, this does not mean that the market will head straight down, as another minor low might be possible before the 18-month cycle downdraft kicks into high gear. Nor am I predicting a crash – just a normal, expected, and healthy correction of 10% to 15%. It does not really matter what I expect anyway. I am confident the algorithm will bring us back into the market at the appropriate time – whether it is a normal correction or a crash. The most important principle at work here is to avoid the correction – no matter the depth.

What I can say with some confidence is that the risk/reward ratio is unacceptable to me at this level. Even if the Navigator Algo trigger is tripped back into a long trade, it would still be a tough decision to accept a buy signal given where we are. Key stocks rolling over on stellar earnings last week has not helped my confidence.

My hesitancy in calling the peak tonight is that the market (purely from a price perspective) has not violated anything important yet. It just achieved an all-time high only a few days ago. Also, the extreme speculation registered in January and February is starting to get wrung out. Internal dynamics have mostly held up, so a return to neutral sentiment conditions would substantially improve the forward risk/reward profile. We’re still a ways off from that – so I will still resolve all doubts in favor of the Navigator sell signal.

If you have not already raised cash or at least culled your portfolio of weak hands, you may have a day or two left to do so. The put/call ratio spiked Friday, and I believe many shorts will be trapped at Friday’s lows. These shorts will be forced to buy to cover tonight and tomorrow morning. We already see this occurring in Globex tonight (Sunday). I discussed this in detail Friday afternoon here. I would also expect the usual impact as 401(k) and other payroll contributions positively influence the first few trading days of the month.

Here is a 30-year composite of the May roadmap:

We went into April highly leveraged at nice dips with fear high. We made so much money in less than a week that I pulled the reins in fairly quickly. But it is an important illustration of the rewards that come from waiting patiently to strike when the iron is hot.

Our number one job as traders and investors is to protect our capital. That is especially important at these lofty valuations. The statistical probabilities are in our favor, as long as we live to fight another day.

This market could continue higher in a gamma spiral – but I seriously doubt it would end well. We have to accept that there is a lot of change in the air – politically, fiscally, and monetarily – not only here but globally. All the market needs is a catalyst to light the correction – and there is a generous supply of potential catalysts looming. How about Russia invading Ukraine? China invading Taiwan? How about both at the same time? We cannot know for sure what the catalyst will be, but there always is one.

Funny, I am having a deja vu moment as I write this, I remember using those same words, “all it needs is a catalyst to bring it down,” in late January 2020. I even said, “for all we know, the catalyst could be this new virus.” Let’s see if I can win two in a row.

Friends, even Goldilocks, did not liver forever.

AF Thornton

View from the Top – 5/2/2021