Preparing for more downside

Since going to a 50% equity position on January 6, I continue to see weakness that corresponds with the macro indicators I follow (e.g., commitment of traders, weekly RSI).  I wouldn't be surprised, however, to see a rally to what I believe will be a intermediate peak sometime between January 16 and 28.  I will be using my options model to assess when I pull the next trigger which will be a reduction of my equity position to 33% that's comprised of a mix of 11% alpha/core and 22% dividend paying/low volatility ETFs -- a "defensive" 33% mix.  Please note that this 33% equity position is the lowest level that I plan to go to for my long-term portfolio during the anticipated weak period from February to May.  I've already taken profits on my cash (trading) account.

More later on the timing of the next move.

Time for some action

As I indicated last year, the market will likely show signs of weakness during the February to May time-frame.  With this in mind, I began looking for a weekly RSI divergence on the S&P.  Well last week, this negative divergence "carved" itself onto the charts.  If it were closer to February, my inclination would be to sell 100% of my core equity position as my strategy would dictate.  However, I couldn't totally ignore the fact that February is just around the corner and a negative divergence is in place.  Thus, I assessed my short-term options model and learned that a sell signal would likely "fire" today.  With these factors in mind, I decided to sell 50% of my equity holdings and take a nice profit from last year's run up.

As we get closer to February, I'll be looking for confirmation of a top and if necessary, identify other selling opportunities.  Please note that because I do not foresee a protracted decline, I will not be going short anytime soon.  I'll be updating the sidebar for the blog to reflect my 2014 predictions.

Well, it's all in

As it often happens, things don't pan out like you think they will -- particularly when politics dominates the market.  From a pure technical perspective, a positive RSI divergence was formed on Friday and on top of that, the market broke out above the trailing 3ATR stop.  Both of these "signals" warranted a 100% buy-in for core positions in my portfolios.  As mentioned in prior posts, my macro indicator has been positive since 9/18, so these recent events buoyed the case for being in equities.  For now, the next potentially tenuous period might be in late January when I see the chance for a correction.  However, that will be another buying opportunity for an upward leg into next fall.

Yes, I'm still here waiting

As I mentioned in my prior post, too much time transpired for a short-term top to form to pursue a short trade.  The macro indicators I follow will be trending up into next spring so I will only be trading on the long side.  So the next question is when to buy in.  Normally, I would look to a weekly divergence between price and the RSI.  This occurred in late June but not since.  Such a divergence would represent a strong buy signal and would prompt me to trade 100% to the long side. Second, I would look for a 3ATR reversal (a break above S&P 1676) as a fall back.  This occurred on September 10.  Under normal circumstances, that would have prompted me to trade 50% to the long side, however, my short-term indicators were flashing caution.  This short-term options-based indicator is now indicating that a buy signal might be generated around 10/16.  If by then the S&P is above 1676, I will trade 100% long; however, if only one of the two indicators is flashing a buy, I will only trade 50%.

My patience might pay off

So if the market's momentum persists, it's likely that my long-standing target of 1686 will be reached.  My options model isn't giving any clear signals but it is possible that it will generate a sell (short) signal in the next two weeks.  The options market is exhibiting very low put/call ratios -- a sign that the market is very exuberant.  If traders start to layer on puts, it won't take much to change the market's upward bias to the downside.  My only issue at this point is that my longer-term futures model is indicating that a bottom (if the market were to correct) is near.  Preferably, I would like to take any short positions soon while my macro-level indicator is still pointing downward.  Taking any shorts after say the 18th of September might entail greater than average risk.