Since my last post, the market rocketed to new highs and my portfolio participated in only limited gains because of my relatively small exposure to the market. Fortunately, my patience is now paying off. Because my short position in SH has appreciated, it's current value is now 37% of my long positions in dividend stocks. Furthermore, because of the relatively low beta of my dividend portfolio, my (small) short position reduced today's losses by a factor of 53%.
I don't plan to add to my short position. However, I plan to further reduce my long exposure in the same way that I did on May 31 by selling profits in stocks that have appreciated by 10% or more. Since I executed my "sell" strategy in late May, several of my dividend stock further appreciated and thus, are now "sell" candidates. Selling such profits will further reduce my long exposure by another 10% to approximately 30% of my portfolio. With my shorts in place, my net equity exposure on a value basis will be about 20%.
As far as my macro indicator, it established a new low two weeks ago and increased last Friday. So what does this mean? Well, as I mentioned in a prior post, my macro indicator isn't great at identifying market bottoms. However, as long as my indicator doesn't start to decrease again, it portends a negative market bias until as late as July of 2020.
As I am writing this blog, S&P futures are implying an open of another -47 points. Risk management is key.
Monday, August 5, 2019
Tuesday, June 25, 2019
Longer term monthly chart confirms negative weekly chart
In my last post, I indicated that I observed a descending RSI on the weekly charts that spans the last 18 months. I looked at a similar monthly chart over the same period and observed the same descending RSI (see below). I believe that when a longer term chart mirrors or confirms a shorter time frame (weekly), the signals are more significant. As shown in the monthly chart below, June will close out with a lower RSI after having made a new high during the month. In my opinion, this is significant. Although we have a few more days left in the month, it is highly unlikely (improbable) that the RSI will break the descent. For this reason, I plan to add to my short position tomorrow on any apparent weakness. I will add to my position in SH so that its total value is 30% of the value of my long position -- this addition represents another 25% over the 5% position that I established last week.
After I add to my short position, it's likely that I will not do anything further to protect my long portfolio. After I make the aforementioned trade, my portfolio will be comprised of the following: 40% dividend stocks, 48% cash, 12% short. As I mentioned in a prior post, I believe that being net short would be too aggressive. Time to sit back and see what happens.....
After I add to my short position, it's likely that I will not do anything further to protect my long portfolio. After I make the aforementioned trade, my portfolio will be comprised of the following: 40% dividend stocks, 48% cash, 12% short. As I mentioned in a prior post, I believe that being net short would be too aggressive. Time to sit back and see what happens.....
Friday, June 21, 2019
More on RSI divergences and expectations for weakness
As planned, I placed a small, rather inconsequential short trade this morning while the S&P hovered at 2953. My macro indicator closed out the week at -54.
As I mentioned in my last post, I decided to dip my feet into a short trade because of the negative RSI divergences I've observed. Specifically, since January of 2018, every peak in the S&P (see green vertical lines in the image below) has corresponded to descending peaks in the RSI (see lower panel) -- this Friday's close and RSI reading was most notable. For this reason, I expect some weakness in the short-term.
With that said, given the "euphoric" price action, there's nothing preventing the market to break the downward RSI trend. In fact, if the market trades between 3050 and 3100, a meaningful breakout could occur. Until that time, as the market makes new highs while creating descending peaks in the RSI, I will add to my short position. Next week, I will be looking for the possibility of further deterioration in the RSI if the S&P exceeds 2964.15 during the week and closes below 2950.46 on Friday.
Remember, positioning for the long-term takes time -- investing isn't a binary activity.
Have a nice weekend!
As I mentioned in my last post, I decided to dip my feet into a short trade because of the negative RSI divergences I've observed. Specifically, since January of 2018, every peak in the S&P (see green vertical lines in the image below) has corresponded to descending peaks in the RSI (see lower panel) -- this Friday's close and RSI reading was most notable. For this reason, I expect some weakness in the short-term.
With that said, given the "euphoric" price action, there's nothing preventing the market to break the downward RSI trend. In fact, if the market trades between 3050 and 3100, a meaningful breakout could occur. Until that time, as the market makes new highs while creating descending peaks in the RSI, I will add to my short position. Next week, I will be looking for the possibility of further deterioration in the RSI if the S&P exceeds 2964.15 during the week and closes below 2950.46 on Friday.
Remember, positioning for the long-term takes time -- investing isn't a binary activity.
Have a nice weekend!
Thursday, June 20, 2019
Is it a divergence? -- A case for a small short trade
The criteria I set last week for a negative RSI divergence will not be met this Friday. However, in looking back at the charts from the highs reached at the beginning of May to the highs reached today, a weekly negative RSI divergence will be formed. Because of the aggressive move over the last three weeks, this divergence hasn't had a long time to form and thus, my confidence over its significance isn't high. In the spirit of my strategy, I plan to place a small short trade using the ETF SH amounting to only 5% of the value of my long positions (as opposed to 10% as originally planned). Going forward, I still plan to "ratchet" into shorts with the next increment being 25% of the value of my long portfolio (assuming that a clear divergence forms over a more extended period while the market rises). The following chart depicts the divergence drawn in white.
Friday, June 14, 2019
Targets for the upcoming week
This uneventful week closed with my indicator declining further to -59. I didn't place any short trades because the criteria for a negative divergence was not met. For next week, the requirements for such a divergence are: (1) the market must exceed 2910.61 sometime during the week, and (2) close (on Friday) below 2886.98. Have a nice weekend!
Wednesday, June 12, 2019
More preparatory thoughts -- My shorting strategy
As I mentioned in my prior post, I plan to establish a short position over time. Specifically, I plan to hedge my long holding by no more than 60%. My incremental approach will be as follows...
As the market makes short-term highs and forms negative RSI divergences before falling into a bear market, I will "ratchet" into shorts using a three step ("1-2-3") approach. My first purchase of shorts (e.g., symbol SH), will be for 10% of the value of the long portfolio. The second purchase will be for 20%, and the third will be 30% (for a total of 60%). This approach assumes up to three purchases. The number of times the market forms weekly divergences will dictate the ultimate number of purchases. Thus, it's possible that my portfolio will be hedged by only 10% if only one divergence forms. Given that my equity exposure is now 42% (in dividend stocks), my net exposure going forward using this shorting strategy will be about 38%, 29%, or 17% depending on the number of purchases (divergences). Since, dividend stocks typically have a beta less than 1, my exposure will theoretically be less than these percentages.
This rising (1-2-3) incremental approach to establishing short positions is consistent with my observation that trade signals from RSI divergences that form over time are more reliable than just a single one. Therefore, the more negative divergences that are observed would lead to a greater conviction that the market will likely decline.
As the market makes short-term highs and forms negative RSI divergences before falling into a bear market, I will "ratchet" into shorts using a three step ("1-2-3") approach. My first purchase of shorts (e.g., symbol SH), will be for 10% of the value of the long portfolio. The second purchase will be for 20%, and the third will be 30% (for a total of 60%). This approach assumes up to three purchases. The number of times the market forms weekly divergences will dictate the ultimate number of purchases. Thus, it's possible that my portfolio will be hedged by only 10% if only one divergence forms. Given that my equity exposure is now 42% (in dividend stocks), my net exposure going forward using this shorting strategy will be about 38%, 29%, or 17% depending on the number of purchases (divergences). Since, dividend stocks typically have a beta less than 1, my exposure will theoretically be less than these percentages.
This rising (1-2-3) incremental approach to establishing short positions is consistent with my observation that trade signals from RSI divergences that form over time are more reliable than just a single one. Therefore, the more negative divergences that are observed would lead to a greater conviction that the market will likely decline.
Tuesday, June 11, 2019
Macro continues to head lower -- treading carefully before shorting
Last Friday, my macro indicator fell significantly to -42. As I mentioned in my last post, I would consider shorting the market to further reduce my equity exposure if (1) my indicator continued to decline, and (2) the S&P formed a negative weekly RSI divergence. Please note that because of the precarious nature of markets (in general), I don't plan to be "net short" -- in my opinion, that would be too risky. Furthermore, I don't foresee placing one large short position; rather, I would build a short position incrementally as the RSI divergence forms -- preferably, while the market rises.
My tentative plan is to reduce my equity exposure by about 50% with "shorts." At this point, I would consider placing only a relatively small short trade (approximately 25% of my total planned short position). Going forward, I will post what the S&P needs to do to trigger the all important negative divergence. For this week, the S&P would need to close below 2873.34 on Friday. Stay tuned......
My tentative plan is to reduce my equity exposure by about 50% with "shorts." At this point, I would consider placing only a relatively small short trade (approximately 25% of my total planned short position). Going forward, I will post what the S&P needs to do to trigger the all important negative divergence. For this week, the S&P would need to close below 2873.34 on Friday. Stay tuned......
Friday, May 31, 2019
How did I do? And, what now?
Now that I've reduced my equity exposure - specifically from approximately 90% to 45% - I wanted to reflect on what just happened and make some bold predictions about what could happen.
I'm pleased that my prediction from a year ago (specifically on 5/26/2018) that the market might peak in May of 2019 looks like it might turn out to be correct -- only time will tell if this month's high proves to be a medium or long-term top. I'm also pleased that my indicator kept me in the market since August of 2016 when I wrote in my blog that I was "all in." It was at that time that I increased my equity exposure from 50% to about 90%. The S&P gained 27% from that time until today. Currently, my 45% equity exposure is comprised of about 30 high dividend-growth stocks.
I wouldn't be surprised if the market attempts to rally at this point -- specifically, it might try to bounce off the 200 day moving average; it might try to fill the "gap down" at 2850; and it might try to test the 50 day moving average at 2870. The market never moves in a straight line and it wouldn't disappoint me if this happens. In fact, if it does AND IF my macro indicator continues to go down AND IF a RSI negative divergence forms, I might reduce my equity exposure further by shorting the market. More on this possibility in upcoming blog posts.
As far as my next bold prediction, I believe that a negative bias might be in force for as much as 1 year (for as long as my indicator continues to go down). As I mentioned in my prior post, identifying market bottoms are usually harder than tops. I think patience will be rewarded and I'm looking forward to buying attractive tech stocks for the "alpha" component of my portfolio and re-buying dividend stocks at depressed levels to increase my portfolio's yield on cost.
Stay tuned.....
I'm pleased that my prediction from a year ago (specifically on 5/26/2018) that the market might peak in May of 2019 looks like it might turn out to be correct -- only time will tell if this month's high proves to be a medium or long-term top. I'm also pleased that my indicator kept me in the market since August of 2016 when I wrote in my blog that I was "all in." It was at that time that I increased my equity exposure from 50% to about 90%. The S&P gained 27% from that time until today. Currently, my 45% equity exposure is comprised of about 30 high dividend-growth stocks.
I wouldn't be surprised if the market attempts to rally at this point -- specifically, it might try to bounce off the 200 day moving average; it might try to fill the "gap down" at 2850; and it might try to test the 50 day moving average at 2870. The market never moves in a straight line and it wouldn't disappoint me if this happens. In fact, if it does AND IF my macro indicator continues to go down AND IF a RSI negative divergence forms, I might reduce my equity exposure further by shorting the market. More on this possibility in upcoming blog posts.
As far as my next bold prediction, I believe that a negative bias might be in force for as much as 1 year (for as long as my indicator continues to go down). As I mentioned in my prior post, identifying market bottoms are usually harder than tops. I think patience will be rewarded and I'm looking forward to buying attractive tech stocks for the "alpha" component of my portfolio and re-buying dividend stocks at depressed levels to increase my portfolio's yield on cost.
Stay tuned.....
Executed Sell Strategy
At 12 noon, after watching the market float around my sell target of S&P 500 2759.18, I sold my exposure to the S&P 500 and all tech stocks. I did this (as planned) in advance of updating my macro indicator because the data feed necessary for computing the indicator wouldn't be available until 12:30 and I chose to mitigate my portfolio risk earlier than later.
My macro indicator declined to -28. Thus, I executed part 2 of my strategy and sold profits exceeding 10% in my dividend stocks at 12:32PM.
My macro indicator declined to -28. Thus, I executed part 2 of my strategy and sold profits exceeding 10% in my dividend stocks at 12:32PM.
Wednesday, May 29, 2019
Higher volatility may call for early action
Because of the heightened volatility, it's possible that my confirming indicator will trigger before I have an opportunity to update my macro indicator on Friday (at 12:30 Pacific Time). I believe that my macro indicator will decrease further and there's a high likelihood that it will fall to -20 or lower. Therefore, I'm prepared to do the following BEFORE I get a macro indicator update:
If the S&P 500 breaks 2759.18 to the downside, I will sell "Alpha" -- specifically, my 20% exposure to the S&P 500 index and all high-beta (tech stocks).
If my macro indicator does fall to -20 or below on Friday, I will execute the second part of my strategy and sell PROFITS (only) of any dividend stock which show paper profits of greater than 10%. Based on my portfolio analysis last week, this sell strategy will leave me with an equity exposure in dividend stocks of approximately 50%.
Stay tuned.......
If the S&P 500 breaks 2759.18 to the downside, I will sell "Alpha" -- specifically, my 20% exposure to the S&P 500 index and all high-beta (tech stocks).
If my macro indicator does fall to -20 or below on Friday, I will execute the second part of my strategy and sell PROFITS (only) of any dividend stock which show paper profits of greater than 10%. Based on my portfolio analysis last week, this sell strategy will leave me with an equity exposure in dividend stocks of approximately 50%.
Stay tuned.......
Friday, May 24, 2019
Almost there -- Update on levels to watch
My macro indicator declined to -15; at this rate, it's possible that it will give a "sell" signal next week. However, as I mentioned in my post last week, one of two confirming indicators will need to "fire" as well. The levels to watch are as follows:
For a RSI divergence, the S&P 500 would need to meet or exceed 2868.88 next week and close below 2826.05. Alternatively, for a trailing ATR3 stop confirmation, the S&P would need to break 2759.18 to the downside.
Given the attention on a trade deal with China, I wouldn't be surprised if the market meanders into June and possibly rise on hopes of a positive outcome. However, I don't believe that it will change the "complexion" of the market.
If my macro indicator goes below -20, I will execute my sell strategy as detailed in a prior post and I'll be looking to see when the indicator reverses to the upside. Although market troughs or bottoms are challenging to predict, my macro indicator is showing that a possible bear market in stocks could extend well into next year. Stay tuned.
For a RSI divergence, the S&P 500 would need to meet or exceed 2868.88 next week and close below 2826.05. Alternatively, for a trailing ATR3 stop confirmation, the S&P would need to break 2759.18 to the downside.
Given the attention on a trade deal with China, I wouldn't be surprised if the market meanders into June and possibly rise on hopes of a positive outcome. However, I don't believe that it will change the "complexion" of the market.
If my macro indicator goes below -20, I will execute my sell strategy as detailed in a prior post and I'll be looking to see when the indicator reverses to the upside. Although market troughs or bottoms are challenging to predict, my macro indicator is showing that a possible bear market in stocks could extend well into next year. Stay tuned.
Friday, May 17, 2019
Formulating a game plan
My macro indicator dropped again this week to -10. Consequently, I continue to formulate a game plan to execute in the event the indicator declines to -20 or less. In the last 18 years, every time my macro indicator reached this extreme level, the S&P 500 has declined more than 20%. In this post, I will discuss key levels and other technical indicators that must trigger to confirm my macro indicator.
As I mentioned in a prior post, I will check two confirming indicators if my macro reading goes down to <= -20. Currently, these two indicators - Weekly RSI divergence and the Weekly ATR3 stop - haven't been triggered. The RSI divergence indicator will trigger if the S&P meets or exceeds 2892.15 sometime next week and closes below 2859.53 on Friday. The ATR3 stop - a slower, less sensitive indicator - will trigger if the S&P declines below 2759.19. An exit after a RSI divergence will likely lead to a sell signal more favorable (profitable) than the slower ATR3 stop. In either case, my primary and secondary indicators (working together) will give me more confidence to support my sell strategy.
Have a nice weekend.
As I mentioned in a prior post, I will check two confirming indicators if my macro reading goes down to <= -20. Currently, these two indicators - Weekly RSI divergence and the Weekly ATR3 stop - haven't been triggered. The RSI divergence indicator will trigger if the S&P meets or exceeds 2892.15 sometime next week and closes below 2859.53 on Friday. The ATR3 stop - a slower, less sensitive indicator - will trigger if the S&P declines below 2759.19. An exit after a RSI divergence will likely lead to a sell signal more favorable (profitable) than the slower ATR3 stop. In either case, my primary and secondary indicators (working together) will give me more confidence to support my sell strategy.
Have a nice weekend.
Friday, May 10, 2019
Thursday, May 9, 2019
Anxiously awaiting market data
With the events of this week, I'm anxiously awaiting market data to update my macro indicator -- the data is published every Friday at 12:30. Given the possibility that I will get a sell signal on Friday, I wanted to share what I plan to do. Consistent with my overall strategy, upon a sell signal, I will:
1. Sell my holdings in market-beta (S&P 500 index) and all high-beta (e.g., high tech stocks) - this
comprises about 20% of my portfolio
2. Sell profits in all dividend stocks which have appreciated 10% or more - dividend stocks comprise
about 80% of my portfolio
Note that a sell signal will encompass two elements: A macro indicator reading of -20 or less and one other long term technical signal (e.g., negative weekly RSI divergence).
Given that fact that your investment strategy differ might differ from mine, you should contemplate ways to reduce risk and at minimum, rebalance your portfolio. Some of you that subscribe to my email updates will get this post Friday morning. If I get a sell signal, I will try to publish a short post shortly after 12:30 on Friday -- note that Google distributes email updates one day later. My capabilities to publish an update will be hampered by the fact that I will be traveling tomorrow.
1. Sell my holdings in market-beta (S&P 500 index) and all high-beta (e.g., high tech stocks) - this
comprises about 20% of my portfolio
2. Sell profits in all dividend stocks which have appreciated 10% or more - dividend stocks comprise
about 80% of my portfolio
Note that a sell signal will encompass two elements: A macro indicator reading of -20 or less and one other long term technical signal (e.g., negative weekly RSI divergence).
Given that fact that your investment strategy differ might differ from mine, you should contemplate ways to reduce risk and at minimum, rebalance your portfolio. Some of you that subscribe to my email updates will get this post Friday morning. If I get a sell signal, I will try to publish a short post shortly after 12:30 on Friday -- note that Google distributes email updates one day later. My capabilities to publish an update will be hampered by the fact that I will be traveling tomorrow.
Friday, May 3, 2019
Market might be nearing medium / long-term peak
My macro indicator dipped this week to a reading of 5. It was 24 last week. This continued deterioration is concerning. As mentioned many times before, a reading of -20 will likely cause me to take action to reduce my equity exposure. If necessary, I will post an update next Friday.
Friday, April 26, 2019
Paying more attention
My macro indicator is continuing to decrease and is now at 24. As you might recall, I consider a dip below -20 significant (see red line below). Given the continued possibility that the indicator could reach this level, I'm extending the window for a possible top. In my past posts, I sited a possible top in early May. Because the indicator has taken so long on its path downward (and because it's almost May), I'm now looking at a window extending to the secondary top on or about July 10 as shown below. Each of the subsequent minor tops in September and November provides possible timeframes for a peak in the S&P 500 if my indicator dips to -20. Stay tuned......
Tuesday, April 2, 2019
Broken Record: Continued deterioration but the pace hasn't accelerated
The "value" of the macro indicator now stands at 54 -- As I mentioned in prior posts, I would become worried once it falls to -20 or less. So for now, I'm staying the course. It's times like this that I value the benefit of macro indicators because with the ebb and flow of news headlines about an impending recession, it's easy to become an "emotional investor."
With that said, I'm still assessing the possibility of an early-May top. If the indicator falls below -20 before then, the signal from my indicator will be relatively clear. However, if it (the indicator) falls sometime afterwards (without first making a new or intermediate high), it will become more challenging to "find" the top in the S&P. I'll worry about this when the time comes.
With that said, I'm still assessing the possibility of an early-May top. If the indicator falls below -20 before then, the signal from my indicator will be relatively clear. However, if it (the indicator) falls sometime afterwards (without first making a new or intermediate high), it will become more challenging to "find" the top in the S&P. I'll worry about this when the time comes.
Friday, February 8, 2019
Continued deterioration but still too early to call
As I mentioned in my last post, the government shutdown delayed the release of commitment of traders data that I use for my macro indicator. The data is now current through January 8 and my indicator is showing continued deterioration as shown in this chart. The chart value is currently 145 after hitting a high of 255. The indicator would need to reach a value of -20 (red horizontal line) before I would make a bearish call. If that were to happen in the Spring, it would portend a peak in the S&P on or abouts the first week in May.
Thursday, January 31, 2019
Data trickling in
With the government now open, the commitment of traders data I use to gauge fund flows will resume its publication each Friday. However, based on an update that I got today, the agency responsible for releasing the data won't get caught up with its backlog until March 8 -- the data they plan to release this Friday will only be for the period ending December 25. To expedite the process, they plan to publish reports on Tuesday and Friday (rather than just Friday) until they are current. As usual, I'll update my market indicator as the data comes in and post any important details on this blog.
Thursday, January 17, 2019
Riding the wave but now in the dark
I "stuck to my guns" during the recent correction as I didn't note any evidence of a possible bear market from my indicator. With that said, I'm now in the "dark." Because of the government shutdown, the Chicago Mercantile Exchange has ceased publishing its Commitment of Trader's data that I use. As I mentioned in my prior posts, I see a positive bias going into the Spring of 2019, but without the Commitment of Trader's data, I cannot confirm whether or not the "peak" exhibited by my indicator portends a bear market (S&P 500). As usual, if I make any trading decisions, with or without this important data, I will let you know.
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