05/21/14 7:53 AM: Morning Thoughts

“After a couple days of mildly positive action, which boosted hopes that the market might be ready to turn back up, we experienced another classic failed bounce yesterday. A little late strength took away some of the sting but there is no disputing how disappointing the action was on Tuesday.

What was particularly troubling about the action was the very negative breadth. We had only about 1530 gainers to about 4150 decliners.  Small caps in particular saw bids dry up but there was some slight relative strength in momentum names as the senior indices started to catch-up with the corrective action in the broader market.

While it is clear that the market is still engaged in a downtrend it is striking how anxious many market players are to declare that the worst is over.  Many were ready to declare that we had seen the lows this past Friday and Monday when we had some minor strength and already this morning there seems to be plenty of folks who are ready to dismiss yesterday’s poor action as just an aberration in otherwise healthy market.

One of the major lessons of the last few years was that momentum often lasts far longer than most people think is reasonable.  Over and over this market continued to run up despite the feeling that we had gone up too far, too fast and were in need of a rest. The market totally ignored what many thought was ‘reasonable’.

We now have momentum moving in the opposite direction and there is an even greater inclination to declare that we have moved enough in this direction and it would be reasonable for a reversal to take place.  The market always has a stronger bias toward upside action so it isn’t surprising that many are ready to battle this downside momentum but the painful truth is that momentum, in both directions, almost always lasts longer than we think it will.

What ends up hurting people the most in a market like this is the natural inclination to anticipate that the worst is just about over.  No one wants to think that this poor action is going to continue so we start looking for positives and dwell on the good action when we can find some.

Everyone loves the idea of being fully invested at the exact moment the market hits bottom but trying to accomplish that can produce some very ugly losses.  People are much more prone to error on the side of being too early than too late.  It is a function of trying to call bottoms. The only way you can call lows is by anticipating them rather than waiting until after the fact.

The most important thing to keep in mind is that when the market action improves it will last for weeks or even months. There will be plenty of time to rebuild positions and ride upward trends.  Too often we rack up a series of losses as we try too hard to time exact turning points. Rather than focus on the overall trend we try to play the little intraday swings that occur and really have nothing to do with the overall condition of the market.

The key thing to keep in mind is that the market is in a downtrend. There will be countertrend bounces and other action that tries to draw us back in but there is no rush to put our precious capital at risk too quickly.

The market stinks right now. Respect that fact and don’t get caught up in all the blathering about when it will be better.  It will eventually improve and when it does we will put some capital back in play and make some money.  Do some short term trading if you are so inclined but don’t listen to the talking heads who want to tell you that the market is healthy and you should be buying.  The price action in individual stocks is very poor and that is really all we need to know.”

Great day for stocks. Dow rallies 160

 

 

The day’s action left us with the following signals: C-Neutral, S-Sell, I-Neutral, F-Buy. We are currently invested at 08/G, 92/F. Our allocation is now -2.94% on the year not including today’s results. Here are the latest posted results:

05/20/14
Fund	G Fund	F Fund	C Fund	S Fund	I Fund
Price	14.4169	16.3542	24.3937	33.2529	26.1253
$ Change	0.0009	0.0249	-0.1587	-0.3946	-0.0553
% Change day	+0.01%	+0.15%	-0.65%	-1.17%	-0.21%
% Change week	+0.03%	+0.10%	-0.26%	-0.34%	-0.41%
% Change month	+0.13%	+0.89%	-0.41%	-1.41%	-0.08%
% Change year	+0.91%	+3.89%	+2.17%	-1.24%	+2.19%
	L INC	L 2020	L 2030	L 2040	L 2050
Price	17.0329	22.1316	23.8355	25.2328	14.291
$ Change	-0.0188	-0.0673	-0.0961	-0.1210	-0.0773
% Change day	-0.11%	-0.30%	-0.40%	-0.48%	-0.54%
% Change week	-0.04%	-0.15%	-0.20%	-0.23%	-0.27%
% Change month	+0.06%	-0.14%	-0.24%	-0.33%	-0.40%
% Change year	+1.29%	+1.54%	+1.60%	+1.61%	+1.62%

Today’s S&P close of 1888.03 is challenging the upper resistance of the trading zone that we have been tracking which is 1890. I fully expect it to be repelled at or shortly above this resistance. Here’s what the SPY looked like today:

Although we saw a bounce back today, price is still consolidating. The PMO which just had a negative crossover that generated a PMO SELL signal yesterday, whipsawed back up. Volume was below average, which could take away some of the significance of today’s rally.

Nothing new yet. We got a bounce into overhead resistance at 1890 in the S&P 500. There is no need to take action until we significantly break out of the current trading zone. That will take more than just a small break through. Until we see a lasting change, which I think will require a pullback of the major indices commensurate to the one that occurred in small cap stocks, we will remain in a defensive posture. May God continue to bless your trades. Have a nice evening!

God bless,

Scott