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.