Hello traders.
It’s been a while.
I am busy in startup world, but have a growing market itch that needs scratched, so what better place than Substack to lay the thinking out?
In October we were expecting a bounce, and alongside the old, ‘don’t be a fool and go short in Q4’, short trades were being closed.
Six months later, are we ready to put on a short again?
The S&P back in October, from my last post, when we were looking for a bounce:
…and how did that turn out?
Always nice when a support line works.
So, fast-forward six months, and the market has been grinding higher for what seems like an age. However, nothing much looks overbought and there’s still not much optimism out there.
That’s reasonable. Here’s the S&P in inflation-adjusted terms:
‘Runaway stock market’?
In Gold terms?
Back around 1970s levels.
All symptomatic of the debasement of fiat currencies that the last few decades of government stimulus, culminating in the COVID madness (though still continuing in this MMT world).
No wonder there’s no optimism!
Quite right!
We can indeed print as much money as we want, but don’t expect it to hold its value. At current rates, in around 13 years, £1million will have lost 50% of its value. Unlucky for some.
4.08% on UK 10-year bonds (or 4.4% on US 10-year) looks like a decent risk-free way to stave off at least some of that erosion.
Anyway, back to trading.
It’s now an ok-ish time to look for risk-off trades.
An ‘average’ market (which it never is, I hear you shout!) - generally struggles to go anywhere mid-April through to the end of June, making it a decent time to try out some short trades, especially as the market has been grinding higher for some time without a pullback.
Add to this some significant divergence in stocks above key MAs.
Despite the grind higher in the S&P, stocks above their 200MA hardly managed to get above their highs of the last few years. Those above their 50MA are looking even weaker.
In general (well, almost always), I would wait for stocks above 20MA to kick up to its highs. I’m not bothered about divergence in that short-term indicator; it’s more used as a signal that the market has run too far to the upside in the short-term. Combine that with medium-term underlying weakness and it’s a setup for a short.
A safe(ish) way to play this could be a pairs trade; long S&P, short NASDAQ.
This pair is kicking back down around dotcom lows and the standard deviation didn’t reach extremes (which often indicates further strength in NDQ).
I quite like this trade as it should work if the market takes a tumble, but also if there’s not a big sell-off but tech stocks start paying attention to high rates. I also like it because the AI furore (don’t get me started) has us reaching levels of AI that we’re unlikely to hit a century from now, demonstrating our collective lack of ‘I’ more than anything else. Whenever that realisation comes home to roost, there will be some strong realignment of expectations.
For a more direct trade, I’ll probably sit and wait to see if there’s a big up day in NDQ (ideally on decent volume) taking us back into recent highs, look to see if AUD, CAD and the commodities are struggling to confirm the move, and see if the gut says it’s time to make a bet.
Whatever makes you uncomfortable.
Nasdaq - some interesting price action around the blue line at the top would get me interested. Targeting a drop to hard-test the top of last year’s price range.
As for the Risk Index itself, it’s been muddling along not giving any valid signals either way.
Given the strength of the weekly A/D line and New Highs/ New Lows on the S&P, I would very much be looking for a buy on any pullback (for now - let’s circle back in September) - and will be looking to see if the Risk Index firmly kicks into the green ‘buy’ zone for that.
“I believe every human has a finite number of heartbeats. I don’t intend to waste any of mine.”
Neil Armstrong
Have a great week.
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