Calvert Whisky Ad, 1943
In this issue
Long-term bullish (of course)
What I’m watching for before pulling the trigger on a short
Risk Index
Under 50 = accumulate, over 70 = defensive, over 90 = distribute
The Risk Index is a combined read of the trends of 68 intermarket spreads and indicators, from credit spreads in the US to car sales in Spain.
No change from last week: highly likely that there will be a 20% correction within the next 6 months, but shorter-term indicators are still failing to show extremes to line up a short.
Any key inputs?
Tuesday - RBA interest rate decision
Wednesday - BoC interest rate decision
A tick in the bull box
Indicators still point to this breakout returning to bite anyone buying in now.
Sentiment agrees: the AI trade has been running for 6 months and the large moves higher we are seeing now are allowing profit-taking from profitable traders, while unprofitable traders become the late-stage buyers, FOMO-ing in.
This final stage can go on for some time; those late-stage buyers need to think they have made the right choice, so that when price goes back past their buy price they are incentivised to wait until their trades come back to break even. This will in turn lead to the price action that creates the next bottom, as they finally lose hope and dump their stocks to those who are ready to buy. The ones who are selling just now.
And the cycle continues.
It creates the ebb and flow of the market.
Longer-term trends (around 10 years) will slowly form throughout that ebb and flow. Spotting when a medium-term dive coincides with the start of a longer-term upside move is where the big money is made.
With this longer-term horizon in mind, it was nice to see the ADL on the S&P weekly chart break new highs last week. As in, higher than it was the last time that the S&P was at all-time highs. Given that a lot of the negativity towards the current rally is due to its breadth, this is a very positive long-term sign.
SPY weekly (top) and its ADL line (bottom)
Still waiting for the washout though
Apologies for being a broken record. We may want to trade fast and loose, but the market doesn’t run on our time.
Still waiting.
If I had to sum up when I will pull the trigger on a short (probably using the Nasdaq, though relative strength (RS) tells us the Russell 2000 is likely the better short as it has had terrible RS all year), here it is:
VIX - already there. Right back at the lows; nobody is pricing in volatility anytime soon.
Put/call ratio. Not there yet - we want to see it heading under 0.5 - the ‘market never going down’ level.
And if those two line up, then it would be nice for the MMFI (stocks above 20MA) to be hitting its most recent highs. Ideally, coming off those highs as the Nasdaq pushes higher on volume.
And, of course, a bit of gut feel added into the mix.
Until the above lines up, I’ll happily wait.
Quote to Self
"“Buy when everyone else is selling and hold until everyone else is buying.”"
~ J. Paul Getty ~
Congrats to those who held until now, and here’s the gift of an easy market to sell to.
Have a great week.