Warning - Investor Running Yellow Lights

Following a systematic approach to investing is crucial. Much like my day job of flying airplanes, successful investing relies on instruments rather than "seat of the pants" instinct. I highlighted recently that my primary indicator of market direction and risk, the NYSE bullish percent, had moved onto defense. In that same post, I stated that I thought a move back up off of support was expected - and that the bullish percents might reverse back up to offense as a result of that move. Sure enough, the market moved back up from support...

No, this isn't a bullish bias on my part. Instead, it's the application of technical analysis that tells me what the market is LIKELY to do. What do we do from here?

There's two factors at play:
1) The market is on defense as per the bullish percents discussed above. This tells me to sell at market resistance points in anticipation of oversupply driving prices lower.
2) My secondary market indicator, cumulative market breadth, came close to confirming the bullish percent's defensive status - but then reversed back up. Note that bullish percents tend to react more slowly.

This leaves me with a yellow light at the intersection, and I chose to accelerate. This has nothing to do with "helicopter Ben Bernanke" lowering interest rates on Weds. Rather, my supply and demand indicators tell me that there are still more buyers than sellers. I am more interested in making profit than I am protecting against minor losses, and in this case I think chart analysis puts the reward/risk ratio in my favor.

Here's what I'm seeing in the market breadth indicators:
Looks like the bullish percents have stopped the bleeding:

So, I'm still concentrated on mid to small caps in the Wilshire 4500 and in the international stocks of the EAFE. Currently the internationals are strongest by far, thanks to the dollar's freefall:

If it gets any worse, we'll have to rename our currency the US Lira.


Thanks for reading!


- Divot

The art of bluffing

I'm writing this from Las Vegas, where I've been flying this week. America's recent obsession with poker provides a lot of lessons applicable to the stock market. Remember, you only get to see your own cards - at least, until the money's on the table. Seeing the other cards requires you to bet, and sometimes it costs more to play (higher stakes). That's the price of poker.

As we're moving through earnings season, volatility has been high with really little net movement in prices. Some individual stocks are getting a beating with the ugly stick, but others are flying high. This volatility has actually resulted in the bullish percents to go "on defense" - indicating a recent concentration of point & figure sell signals.












Remember, the offensive/defensive status of the market is not a timing device. Rather, this gives focus to our risk management - whether to operate in wealth accumulation or wealth preservation mode. In other words, do we "buy the dips" or "sell the highs". Since we're "on defense", I'll operate in the latter fashion. That means I'm not intending to sell everything right now, since we're still resting on the 50 day moving averages (read also: NOT at a high point, but still hovering near the lows). I'll look to sell as the market moves back up to its most recent high - assuming that we don't go back on offense in the meantime (which is likely).

On the other hand, market breadth has survived reasonably better than the bullish percent indicators.

Market breadth shows me that in spite of the new P&F sell signals that influenced the BP charts, the overall market remains balanced. To put it another way, it only takes 6% of all stocks to move from a buy signal to a sell signal in order to put the BPs on defense. Although this has happened, enough other stocks have moved up to keep the advance/decline line rather neutral. My read on the situation is to bet on the bulls to carry us higher after this "pause that refreshes."





Notice in the following chart of the S&P 500, that we continue to close above the 50 day MA. Although Weds was actually a down day, I look at that high volume during the wall-to-wall trading session and conclude that a short term low was confirmed.
Similarly, the EAFE and Wilshire 4500 are even farther above their 50 day MA. I'm happy to be in these two indices, as their relative strength is significantly better than the S&P 500.











Thanks for reading and commenting.


- Divot

I'm Buying More

We interrupt this market dip to inform you that this blog's author is buying stocks.

I posted last Thursday about "Zen and the Art of Confident Investing", and my point was that it's OK to buy and hold (and buy more if you can) - AS LONG AS THE MARKET IS "ON OFFENSE". This of course is defined as the bullish percents in a rising trend, which they are:Please note that buying and holding does not work when the bullish percents turn around and start to fall. That's when I seek to protect my money rather than look for ways to put it to work.

See, I bought into some of the leveraged ProShares funds promptly after the market went on offense, and they've done quite well so far. Here's my portfolio and current results:

• ProShares Ultra Oil and Gas (symbol DIG): +29.0 %
• ProShares Ultra Industrials (symbol UXI): +9.2 %
• ProShares Ultra Basic Materials (UYM): +25.7 %

I'd also purchased the Ultra Financials fund (UYG), but sold with only a minor gain last week due to relative strength lagging the pack. This left some cash to hunt bargains, and the tech sector appears healthier than others. I found Synchronoss Technologies (SNCR) which is really on a tear with great fundamentals, technicals, and insider buying to boot.

I bring all that up simply to illustrate my recent theme - don't panic at the market's little wiggles when we're on offense. Price dips are good buying opportunities here. Take a look at the S&P 500: I've highlighted the rising price channel, and we're nowhere near breaking out of this one. If you consider that the current uptrend was really based on the Federal Reserve's September actions, Monday's price falls right at a 38% retracement level. That's good news for bulls - closing lower than the 50% line would be bad. Even then, I wouldn't really consider selling until the lower trendline was broken or the BP's reversed down.

The Wilshire 4500 looks nearly identical:

The internationals (EAFE) continue to look stronger than US markets, and prices are currently at the bottom of the trend channel. Support from buyers looks very good.

The EAFE is of course running with the wind at its back due to the dollar's freefall in value. Here's the latest damages to our purchasing power:
Thanks for all the comments and questions - I'm honored to have you reading.


- Divot