It’s difficult at times to keep emotions out of trading. I
was a victim to emotional trading last week. After posting
my thoughts on the longer term downtrend in the stock market just a week prior
, I went against my initial thoughts on Friday and tried to play the market to
the long side. I’m not making excuses but highlighting for myself the trading
rules that I broke that cost me gains in the portfolio (I took very small
unnecessary loses on Friday).
Here’s where I went wrong:
1 – My phone was constantly ringing all day. With open
trades I need to remember to keep my focus and return calls after the market
closes.
2 – Several stock market experts were hugely bullish on TV
Friday as the SPX briefly pierced the 2000 level to the upside. I have been in
cash for the month of March after having the market rebound strongly (we had
excellent returns in January and February) and was swayed inappropriately by
outside influence to go against my trading thesis.
3 – Don’t over trade. It’s perfectly fine sitting in cash
waiting for the highest probability trade with the optimal entry point.
As a student of behavioral finance I understand to err is
human, as long as one can reflect and learn from ones mistake.
Enough beating myself up…time to move on.
The Risk-Off Trade
We outlined last week the pitfalls that may lie ahead for
equities. This week we are going to go through the several “risk-off” trades
that complement our thesis that the lows in the stock market haven’t been
reached.
Treasuries
On the daily chart, long term treasuries (as tracked by TLT)
are indicating near term bullish divergences between RSI and Stochastics and
prices. There appears to be a bullish flagging pattern going on with prices
resting on support. The pullback that we have seen over the past few weeks has
been on low volume and MACD has been trending higher. Relative performance
against SPX is positive.
On the weekly TLT chart it’s more difficult to determine. One
can see price action as a double top on waning momentum as seen with RSI and
Stochastics or a possible bullish cup and handle formation developing. Time
will tell but given the other technical metrics we are leaning towards the TLT
bulls (risk-off). Relative performance against SPX is channeling higher and
MACD looks like its consolidating with the potential to break higher. More
confirmation is needed but we are leaning towards the TLT bulls (risk-off).
On the TLT monthly chart the price action looks relatively
healthy although I’d watch that higher high on waning momentum. That could
prove a problem over the long term.
Gold & Silver
On the daily gold chart (GLD) we have a persistent and
healthy overbought oscillator profile, with RSI and Stochastics trading above
50 for quite some time. There is some divergence between MACD and prices that
are bullish with the recent daily parabolic upward thrust coming on big volume.
On the GLD weekly, it shows prices reaching points of
resistance but the MACD has gone positive. The recent thrust off its lows has
come with exceptional volume and strong candlestick formations. This could mark
a bottom of a multiyear downtrend. Consolidation should be expected and moves
above and successful retention of the 200 week moving average would be a great
sign. The 20 and 50 week moving averages just completed a bullish cross.
On the long term chart RSI (14) is above 50, MACD has a
bullish signal cross and the slope of the 20 month moving average is flattening
and about to slope positive. There has been an aggressive thrust through the 20
month moving average on strong volume and healthy candlesticks. With support
near $1000 per ounce this has the making of the end of a multiyear downtrend.
Something to watch closely.
Silver also looks interesting. On the daily chart momentum
has clearly trended positively and price action exhibits bottoming action. MACD
has also been trending higher since late last year.
Silver weekly has seen all oscillator action trends above
50. Prices broke through the 20 and 50 week moving averages on strong volume
and robust candlesticks. Similar to gold prices, this has the makings of the
end of a multiyear downtrend.
On the long term monthly chart silver, like gold has seen a
bullish MACD signal cross. It has bounced off its 200 month moving average and
RSI (14) has curled higher, albeit still in a weaker sub-50 position.
Japanese Yen
Another measure of “risk-off” we look at is the price
action of the Japanese Yen. The RSI (14) has traded above 50 for some time now,
while the currency has made a series of higher lows and higher highs.
Stochastics has recently reached oversold levels without a major drop in the
currency where pricing action shows a flagging consolidation off its recent
parabolic advance, typically a good thing. MACD is also exhibiting a higher low
higher high pattern which indicates bullish momentum.
On the weekly chart the trend appears to have turned to a
bullish profile. All oscillators and MACD are trending higher and pricing
action seems to have turned. We have also seen a 20 and 50 week moving average
bullish cross.
The monthly chart for the Yen is very compelling. RSI (14)
had been languishing in a prolonged negative momentum loop but has re-emerged
and is about to break 50 to the upside. Prices have moved strongly through the
20 month moving average and MACD has had a bullish signal cross. In previous
years, when all these items happened together it signaled good times ahead for
the Yen. This pattern occurred in 1999 and 2007, one year prior to rough equity
bear markets.
The Vix
Market bottoms rarely end with a whimper. The recent sell
off in equities came without the levels of panic usually associated with market
bottoms. Perhaps as investors we have been conditioned in the short term not to
over react given the actions of global central bankers and the “Bernanke Put”.
For bottoms to be reached we need to see the VIX hitting levels in the 40’s and
50’s typically. The VIX spot future spread needs to accelerate well above 1.0
and the put-call ratio needs to rise above 1.4. The rate of price change in the
VIX also needs to be unusually violent rising above 50%. We just haven’t seen any
of that. The SPX was unable to hold on to gains above 2000 last week and there
seems to be some residual resistance above. With the VIX now resting on support
after a series of higher lows and higher highs it isn’t out of the question to
think another bout of bearishness is lingering around the corner.
Bottom Line: With so
many risk-off trades exhibiting positive trends, it adds further confirmation
on our thesis about the equity markets this year. In previous writings, we had
been expecting market weakness at the start of the year (which we had
capitalized on with our portfolio up 9% this year thus far) with a reflex rally
to end the 1Q16. The theory seems sound so far. We have also commented on
weakening global economic growth, declining corporate earnings trends, a
confusing monetary policy and a chaotic Presidential election cycle as reasons
the market hasn’t hit bottom yet for the year. Technically speaking the stock
market has entered a new down trend. We will be watching closely to
developments but right now we are waiting for a large volume sell-off day to re-establish
our short positions for what we see as a potentially rough summer for equities.
Joseph S. Kalinowski, CFA
Email: joe@squaredconcept.com
Twitter: @jskalinowski
Facebook: https://www.facebook.com/JoeKalinowskiCFA/
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