Patience at 50% Exposure

So I haven't written for a while, partially because I haven't done anything investment-wise since going to a 50% cash position in mid-September.  I still remain skeptical of any pronounced gains from here and believe that there's a greater likelihood of revisiting the August lows.

Looking forward, my macro indicator is "saying" that there's a possibility of a low being reached in April of 2016.  If the market does continue to correct, I plan to deploy my cash going into this potential April trough.  Although the macro indicator is also showing a possible correction in fall of 2016, I don't believe that it would be significant enough to defer buying that long.

Macro Update

The updated (weekly) macro indicator showed only minor deterioration compared to last week -- down to a -13 from -9 the prior week.  The indicator still has not reached the "critical" level of -20 that would cause me to believe that a bear market is impending.  Given the deterioration, however, I will not be adding to my equity position even if the prior August lows are tested.

Some thoughts just in case

As I'm writing, China just reported another dismal PMI and US futures are pointing to another tough open.  I just wanted to share my thoughts on what I would do if my macro indicator turns down and signals a possible bear market.  Because the majority of my portfolio is comprised of dividend stocks, I hope that my readers can extrapolate the essence of what I'm doing and apply it to their portfolios.

First, my system calls for being no less than 50% (exposed) to equities for as long as the macro picture is positive -- that's my current stance.  Here are my priorities if and when the outlook changes:

• Look for confirmation of a reversal (if the market rallies) that would be evident by a weekly RSI divergence and/or a violation of a trailing ATR3 stop.  In regard to the latter, I generally use a loose ATR4 stop when the macro is positive.  However, I would transition to a tighter ATR3 stop as a signal to take action on my holdings (see below).  Currently, the ATR3 stop on the S&P is 1918.
  
• When I obtain a confirmation, I would sell my "alpha" or any momentum or core holdings that correlate highly with the market.
  
• I would further trim my holdings by taking profits on any dividend growth stock that have appreciated more than 10%.  Specifically, I would sell shares amounting to the profits in a stock.

The actions above will undoubtedly results in an equity exposure of less than 50% in my case.  The next step which I will detail in another post this week would be to hedge my portfolio -- the holdings that I intend to keep for the long term.  This step will entail going short the market using an inverse ETF (e.g., SH, SDS, etc.) to further minimize downside risks.  

It's times like now that I wish my macro indicator was based on daily data.  Unfortunately, the data is provided by the Chicago Mercantile Exchange only on a weekly basis.

That's it for now.  

My macro indicator is worrying me - Time to revisit the possibility of a month-end top

As I mentioned in my prior posts, my macro indicator has been showing signs of health and given me no reason to be concerned about a bear market.  Before I get into the details of my most recent analysis, the embedded image depicts data from my macro indicator.  Based on historical backtesting, when the indicator goes below the red line, it signals a possible bear market with the peak in the region from points A to B. This span of time from August 4 to September 30 is a "window" of time that I had mentioned in my posts over the last year as being a possible top if my indicator falls below the red line.

When the indicator bounced off a low at point E and began to trend upwards, I believed that the probability of the aforementioned top and a start of a bear market was low.  The significant decline this week has me worried.  If the indicator falls below the red line in the weeks ahead, there are two ways to interpret this signal: (1) that the market is vulnerable on or abouts September 30 to a bear market, or (2) that a peak will be deferred to the fall of 2016 at point F.  Given the short span of time between points E and F and the fact that the indicator failed to break the peak at point D, I have to place my bet on my first interpretation -- that a bear market could be around the corner.

In regard to my last post in which I shared my plan to buy into this market if it traded down to 1867 or penetrated 1990 to the upside, I did "take some of the bait, but didn't swallow the hook."  Specially, I increased my equity position by only 5% because I couldn't find anything to buy that met my criteria.

Given what I know now about my macro indicator, I believe that it's prudent not to add to my equity position.  In my next post that I plan to publish before Wednesday, I will discuss the bear market scenario, and a plan for what I would do to mitigate risks of a decline.

Tuesday update -- The FOMC guessing game

The market is exhibiting strength ahead of the FOMC meeting and on an intra-day basis, it's penetrated the trailing ATR3 stop at 1970.  However, on a pure technical basis, there's clear resistance in the 1990 region.  Given that I went to 50% cash at 2058, I'm willing to be a bit more patient to see how the market reacts when it revisits 1990.

With respect to my macro indicator, I still see no reason to believe that we are entering a bear market. Therefore, my approach to the market is still to to buy on any significant pullbacks or on a clear breakout above 1990 with confirmation by other short-term technical indicators.  My ideal entry-point would be a retest of 1867, but given a positive macro condition, it may not be wise to be too selective.

Looking for the ideal setup for a strong "buy" signal

I continue to believe that we are experiencing a correction in a bull market.  Detailed below is the ideal setup that would compel me to deploy all sidelined cash (up to my portfolio equity allocation) into this market.  Given the short-term weakness exhibited last week, I wouldn't be surprised if the market retested the low near 1867.  If this retest occurs this week, I will be looking for a positive RSI divergence to form with a weekly close above 1921.

My short-term indicator based on equity and total put/call ratios isn't yet giving me actionable signals.  If and when it does (combined with confirmation from money flow indicators I use), I'll post an update.

How fast can the market draw a "V"

Boy, do I have a lot to say......

I thought I would have at least a week before writing another post about possible entry points.  So why am I writing today?  We'll, in a matter of a couple of days the market has breached to the upside a level that I had noted in the back of my mind as a possible entry point -- the trailing ATR3 stop at 1970.  Am I a buyer?  NO.

First, some facts.  The market on an intra-day basis reached a low of 1867 this week -- pretty close to the 1877 level that I had mentioned (predicted) in my last post.  This represented a 12.5% correction from peak to trough.  So was this the correction that everyone was waiting for?  Or was it just high frequency traders playing with our emotions and using China as an excuse.  Who knows!

When the market started to falter last Thursday, I found it amusing that MarketWatch cited a prediction by Tom McClellan that the market was about to get ugly.  He also said that "we" needed to be prepared for a correction lasting several months.  As readers of this blog might recall, I mentioned Tom in a prior post when I commented that he and I use the same macro indicator to gauge market liquidity.  I also said that I didn't share the same level of pessimism because liquidity hadn't dried up that much.    Despite this, this guy looked like a genius for about two days.  I still disagree with Tom, but now what?  Even though I don't share his longer-term pessimism, I am approaching the market cautiously.

Going back to the trailing ATR3 stop at 1970, I usually use this type of stop as a trigger as a last resort to get me back into the market because it's generally pretty good at identifying changes of trend.  However, the speed at which the market broke the ATR3 stop on the downside and upside causes me to be reluctant to use this trailing stop.  After all, I wouldn't described what's happened this week as a (bearish or bullish) change of trend.  What the market did over the last week resembled more like a flash crash.

Given the fact that I went to a 50% cash position at S&P 2058, I have a little bit of breathing (thinking) room to see what happens.  Specifically, will the market hold above 1970.  Technically, 1970 is a significant level for other reasons.  It just so happens that the market "gapped" down at this level.  Historically, markets tend to revisit areas of prior gaps before resuming short-term trends -- in this case, downward.  (It's revisiting this level as I am writing this post) This gives the smart money another opportunity to sell to unknowing buyers who think the market will continue onwards and upwards.  I hope that I'm right because I would love to buy some stocks on the cheap.

Talking about cheap, the other reason why I'm not anxious to go head over heals into this market now, is because even at sub-1900 levels, I couldn't find any dividend growth stocks to buy.  Sure, I could have bought some beaten down tech names, but those stocks aren't on my radar and not a key part of my long-term plans.

So in closing, the S&P is now up 46 to 1987 -- I just have one word, "Wow."

Focus on buying opportunities ahead

As planned, I reduced my equity exposure to 50% on an intra-day break of S&P 2058 on August 12.  This has helped me weather the storm over the last week.  Currently, my long-term portfolio consists of 50% cash, 40% dividend growth stocks, 5% Apple, and 5% SPY (S&P 500).

Despite the turmoil in the market, the liquidity contraction exhibited by the macro indicator that I follow isn't that pronounced (in my opinion).  Historically, there's a pretty good correlation between levels of contraction and the extent of market corrections.  Based on this correlation, I don't see a correction of more than 10-12% which is pretty customary and not a sign of a bear market.  I'm not expecting any protracted moves lower than S&P 1875.

For re-entry into this market, I will be looking for a reversal that penetrates the trailing ATR3 stop and/or a bullish RSI divergence.  I'll be posting specific levels in upcoming posts.

Although, the short-term is on most people's mind, I'm looking for the possibility of a more ominous correction sometime in the fall of 2016.  It's still way too early to draw conclusions, however.

Positive Macro View

I just updated my macro indicator and learned that there isn't any indication that a bear market is upon us.  Bear in mind however (pardon the pun), that even in bull markets, there's always a chance of a 10% pullback.  As I mentioned in my prior post, I will take some off the table if the market breaks 2057 to the downside, but since the macro is still positive, I would be anxiously looking for buying opportunities.  At this point, I'm about 65% in equities with the remainder in cash.

Is there an escape hatch? -- Yes

I just wanted to share with my readers that there is a plan to mitigate the risks of this market.  Given, that the macro condition as of today is still positive, I would be reluctant to sell too much.  However, if the S&P were to close below 2057, I would go to a 50% equity position.  I will be updating my macro indicator with the weekly data that gets published tomorrow (after the close) to see if there's any other reasons to worry about this market.

It's a tough call, but someone's gotta do it

Believe it or not, with as much fear in the market, the facts before me don't support a bear case . Here are the technical factors that support a bullish stance:

1. Macro Indicator: My macro indicator that gauges market liquidity isn't showing a continued deteriorating condition. It's sorta interesting though that a notable technician, Tom McClellan, recently spoke on the Financial Sense Newshour podcast and cited the same macro indicator I use but shared an interpretation that differs from mine. He's calling for an August top, but in my opinion, the indicator hasn't deteriorated enough to warrant the pessimistic call -- at least not yet.

2. Relative Strength: The S&P successfully tested it's 200 day moving average and has since bounced. Furthermore, a key component of the market -- financial stocks -- has showed a lot of resilience from a relative strength perspective. Lastly, the market closed out the week by forming a (minor) positive RSI divergence.

3. Short-term Options Activity: My short-term model appears as though it will generate a buy signal by Thursday, July 16.

As I indicated in a prior post, my "system" would call for a fully invested stance if the market penetrated the trailing ATR3 stop. That level currently stands at 2106. Given the positive divergence and the impending short-term buy signal, my plan is to deploy 50% of sidelined cash by Thursday and then deploy any remaining funds when 2106 is breached to the upside. Please note that the actual amount deployed will depending on finding attractive stocks for my dividend growth portfolio, which represents a sizable portion of my allocation. By attractive, I mean from both fundamental and technical perspectives.

So there you have it.

OK, Now What?

As planned, I took more off the table when the S&P broke 2071. More precisely, I sold the Russel 3000 at S&P 2074. By doing so, my equity position is now less than 50%. My trading system normally calls for an equity allocation of 50% under current circumstances, but I'll admit that my emotions together with an anticipation of further macro deterioration, have gotten the best of me and as a result, my equity level is more like 33%. Normally, I would feel uncomfortable with such a low equity allocation, but given that most of my selling occurred when the S&P was at 2100 makes me feel as though I wouldn't miss out -- if the market takes off from here. The difficulty at this point is making the right moves without knowing what my macro indicator will ultimately do. Thus, I'm more inclined to withhold from further selling and ride it out until I know more. With the market near the 200 day moving average, the S&P could bounce here, but my short-term indicator appears as though it will not signal a "buy" until mid-July. So if you've been reading my blog, you know that it's possible that a top might be forming and that a top might occur in August. So the challenge is whether to buy into any rallies or to sell into it. At this point, I'm still thinking that the market will rally into August but I don't think that adding to my equity position is worth the risk. Given that the market dipped below 2070, I wouldn't even consider buying unless the S&P crossed back up over 2115 which corresponds to the current trailing ATR3 stop. Hopefully, by then, my macro indicator will give me guidance to either sell or jump back in.

Pins and Needles Kind of Week

I wanted to update my readers that my macro indicator, which is updated every Friday, is not showing any additional signs -- bullish or bearish. If a top is forming, I fully expect to see additional gains in this market which is customary as "smart" money distributes their holdings to the gullible. The key to any rallies will be to assess whether relative strength and volume indicators support a continued bullish trend or the aforementioned (bearish) distribution. My short-term indicator which assesses speculative behavior in the options market appears as though that it will signal a sell early next week. This combined with the fact that the weekly RSI traced a bearish divergence today caused me to trim my holdings at or abouts S&P 2100 by selling holdings that have shown weak relative strength. As I mentioned in my prior post, if the S&P breaks 2071 to the downside, I plan to take more significant steps to reduce alpha.

Time to think about a possible bear market

As I mentioned in my prior posts, my macro indicator has been showing signs of significant weakness. If this weakness persists, it would translate to a possible top in the S&P 500 sometime between early August and mid-September with the greatest likelihood being August. I've been wary of warning my readers too early because the macro indicator has had some short periods of positive movement. However, in looking at the trendline over time, the positive short-term movements have traced lower highs and it is now close to giving me a confirming signal. Until I get this confirming signal, it's important not to overreact. It would be prudent, however, to harvest some gains and think about selling holdings that have exhibited poor relative strength. Irregardless of the macro indicator, my trading system is calling for a 50% reduction in core holdings if the S&P falls below 2070. I'm often asked if I would short this market. My philosophy on this topic has been to only consider shorting when my macro indicator supports it. In addition, I would only consider shorting if a downturn appears as though it could be protracted and deep (i.e, 6 months or more). All technical indicators have limited predictive potential, but my macro indicator which gauges market liquidity, is "saying" that a downturn could be on the order of 10+ months. Again, this estimate will only be valid after I get a confirmation. So until my next post, I'd highly recommend you think about what you would do in the event of a bear market. If and when I get a confirmation, I will detail my strategy including an approach to shorting the market if I believe the risk in doing so is worth taking.

Took cash off the table

With the market not acting in step with the indicators I follow, I decided to jump ship at S&P 2077 and go to cash (in my cash account). Not touching my IRA just yet.

The Fed made me do it

With the anticipation that the Fed would make a significant change to its guidance, I deployed 50% of sidelined cash this morning.

So where do we go

In looking at the charts from a long-term perspective and applying trendlines and fibonacci analyses, the market might gravitate toward 1940. Holding 1940 will keep the bull market intact. The 1940 level also represents a confluence of fib retracements -- a region where the market might fall back to. I'll be posting more often as I need to shake off my complacency and "play" the market more aggressively in hopes of profiting from what I believe to be good entry points that I've identified in the past.

Forced to Sell

With an intra-day break of 2064 (ATR4), I sold 75% of core positions which according to my allocation, still affords me an equity exposure of 50%. To belabor my mistakes, I ignored (again), my short-term indicator which gave me a warning on 3/3....the dangers of complacency.

Fully invested

With the intra-day break above ATR3 stop at 2063, I invested the remaining idle cash near the close.

Trades Executed

With the down market open, I traded 50% of sidelined cash at S&P 2015. Given that I was already 25% invested, this incremental amount puts me at approximately 62% invested.

Time to Trade

My short-term indicator is likely to fire a buy signal on Thursday. Given the possibility for the ECB to announce further QE, the question is whether to buy early (tomorrow) or after the announcement on Thursday. It's a bit of a crap shoot, but given improving money flow, I like the setup and I plan to invest 50% of idle cash tomorrow by 10:30 Pacific. If the market continues to rise, I will invest the remaining 50% upon an intra-day penetration of 2063. If the ECB disappoints on Thursday, I will follow the ATR3 down and buy my second round at a lower point. Based on my macro indicator, I still believe in a positive bias through August. The macro indicator continues to weaken beyond that point but I'm not ready to call August the top.

So what's the plan now?

The market failed to penetrate the trailing ATR3 stop on Friday but that level 2063 still remains a potential buy target. However, my short-term indicator is pointing to a possible buy signal on or abouts January 22. Hoping for lower levels for a nice entry.

Evening Analysis -- Plan for Friday

In reviewing the day's action, I'm less concerned primarily because of the lack of diverging signals. Prior tops have always coincided with divergences in either money flow or RSI -- that condition doesn't exist. Also, every time in the past when the money flow indicators have penetrated the zero-line to the upside, the market continued to rally. I believe that the recent decline to 1992 was technically significant because it essentially touched the long-term upward trend line. Thus, the correction is likely over. This combined with a healthy macro condition, my objective is to buy on a break of the nearby ATR3 stop at 2063.65.

Here we go again! Another "V" bottom

So these V bottoms are becoming commonplace. I resisted the urge to buy into the last rally that began on December 17 because the money flow indicators didn't support the huge run-up to 2093. Since then, the market retraced its gain down to 1992 and money flow indicators reverted to near their downward sloping trendline. However, today, the money flow indicators are penetrating their downward slope to the upside and the market is roughly near resistance again -- it's now 2062 and there's minor resistance at 2076 followed by 2092. The other problem I have with this set-up is that my short-term indicator is going to fire a sell tomorrow. My short-term indicators are inherently less reliable but I need to recognize that too many flags are red and that I think it's best to proceed with caution. The only thing in favor of a continuation of this rally is that the money flow indicators aren't tracing a negative divergence.