Jughead's Time Police, 1990
In this issue
Seasonals favour the bears
My pick for 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.
A month on since my last post and the Risk Index has pared back a bit. This is not always correlated to equity prices moving higher: the Risk Index shows underlying market stress, not a reflection of equity market price.
So this tells us that, for now, any pullback presents a buying opportunity.
Any key inputs?
Central Bank Week: Fed on Wednesday, ECB on Thursday, BoJ on Friday
Say hello to the Q3 Bear
A month ago, I noted:
I’ve seen a few people already trying to fade this equity rally and wanted to fire out a word of caution.
Is the setup there? If it isn’t, you must respect the momentum and stay out of the way.
Enjoy the waiting game - or enjoy the ride if you’re still in on a long!
Well, a month later and equities are higher. The Risk Index is not as bearish as it was, but is still promoting caution, so I’m still hunting for a short.
Is the time right now?
Here are the average quarterly gains in the S&P since 1950:
Any which way we split the data, the Q3 dip is there:
And when we drill down into the months, there’s a clear winner for bears:
In my lifetime, these datapoints won’t change significantly (though the keystone equity index may do, opening up a whole new set of stats!). So, similar to never opening a short in Q4, I’ll never open a long in Q3.
Shorter-term indicators are also lining up for a short.
There are plenty of metrics, but I’ll stick with my ‘Stocks Above Key MAs’ scan which sums things up. A month ago, there was still a lot of slack in it. Now it’s looking stretched:
So, is it time, at last, to take a short?
In the week where we have Central Banks batting to create some volatility, I would nevertheless stick my neck out and say yes. I won’t expect to get a home run from the first pitch, but this is the right timing and the right type of extension in the market to start looking for shorts.
I have already taken one. Price was in the right spot; had to be taken.
The Russell 2000 - price hit the top of a potential consolidation pattern, which was also just above the 100 WMA and 2000 price zone, which also happened to be a key closing price on yearly candles over the last few years. Too much confluence not to enter.
Overall, the Russell 2000 is far from looking like it is out of a bear market. If the overall market falters, I want to be short the weakest one.
I’m due a Trader Diary post as I said I would pop one up if I took a trade. I’ll get that in before the Fed, as the fallout from this week will likely set up some good trades as we head deeper into seasonal weakness.
Quote to Self
As I suspect I’ll be a bit more active trading over H2 of 2023, this Seykota quote seems appropriate:
"The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance."
~ Ed Seykota ~
Have a great week.