July 9, 2018
AT A GLANCE: The Summary Index turned higher Friday and will give a buy signal on Tuesday, even if there are no changes in the indicators by then. It can happen on Monday if 6 indicators turn higher. Also, The S&P 500 is set for a buy loop with a volume increase on Monday and Tuesday. Our plan to reenter the market with positions in SPY and/or QQQ is in play.
QQQ had a particularly
good week according to the GPS Program, so both it and SPY
are now in position to be bought. We plan to open 10% positions
in each when the Summary Index buy signal occurs on Monday or
Tuesday. Our mental stop losses will be around 169 for QQQ and 269 for
A list of current and closed trades appears with the table above at the regular link (Discretionary GPS Portfolio), which you can also find among the links at the beginning of every report. The preferred ETFs for trading are QQQ, SPY, XLB, XLF, XLK, XLU, XLV and XLY.
The NASDAQ & S&P
500 and the Dow Transportation & Industrials finished
the week in the same order they held the week before -- N++S+ and
T++I+. The market is again starting week with a small positive
The most reliable combinations are those in bold type. The very best performers are colored green, while the very worst are in pink. The tables will be updated each week so we can follow the results going forward. Additional explanatory material is posted here, here and here.
General Market Comment
The Fourth of July week added another victory this year. In the 17 years from 2002 through 2018, profits have been earned 12 times (71%) when SPY was bought at the close on Friday before the holiday and sold at the close on the second trading day after.
Once again the market finished the week by reversing what happened at the beginning. The S&P gained on the two days after the fourth (1.71% total), after losing 0.17% on the two days before.
The most consistent winner has been the second trading day following the fourth. However, even though it gained less frequently, the day immediately following the fourth holds the record for the biggest average gain, thanks to a 3.67% jump on July 5, 2002.
Last week, after briefly skirting the lower border of its rising triangle, the S&P 500 moved closer to a rendezvous with its upper border. The possibility that the S&P will penetrate it this week is enhanced by the likelihood that a new Summary Index buy signal will occur on Tuesday.
The new SI buy signal offers us the opportunity to take a speculative position in the hope that a breakout from the triangle will propel the S&P to a new all-time high above 2872.87, which was reached on January 26.
With this in mind we are setting our stop loss just below 2700 for the S&P (roughly equivalent to 269 for SPY (2.2%), and to 169 for QQQ (3.4%). The decision to place the trade before the S&P breaks above 2786.85, or to wait until after, should be made according to one's personal tolerance for risk.
The S&P 500 recovered 50 of the 70 points needed to make the June 16 Dow final hour trading indicator buy signal a success. Now, with a Summary Index buy signal due tomorrow or Tuesday, there is a very good chance the S&P will gain the 20 points needed before the 20 days are up on Friday. A win will make it 30 out of 34 for a five-year success ratio of 88%.
The S&P 500 MACD indicator turned up again last week, but it has not yet penetrated its signal line (red dashed line). Consequently, it has entered the fourth week of its sell signal.
The number of S&P 500 stocks with positive MACDs reached 200 on Friday, up from a low of 138 on Monday. The indicator stands 50 positive stocks short of the halfway mark, where it will change from a sell signal to a buy.
Seeming to ignore the threat of a trade war, margin debt reached to a new high in support of a renewed market advance. One reason to ignore the threat may be the Shanghai stock market. To skip to the technical indicators, please click here.
US Census Bureau figures reveal that the trade deficit is still growing. However, its rate of growth -- just 2.69% annually -- is at a 16-month low. With the dollar 15% higher than it was 5 years ago one might expect to find imports moving higher and bringing the deficit with it, but exports continue to hold their own in spite of trade war fears.
The strength of international trade, and the contrast between the US and Chinese stock markets may be playing a role in the current negotiations between the two countries.
After a pause in February, US investors drove margin debt to yet another new all-time high of $668.9 billion in May. Debt is not growing as rapidly as it did in November, December and January, but as long as it is reaching new highs the market advance is likely to continue.
Data is released a month late, so its warnings are tardy, but the debt grew by 2.6% in May and it is likely to be higher now. In the past, the S&P 500 has turned lower within a month or two of a peak in margin debt.
In this 50-year chart of monthly values for the S&P 500, each major peak in the margin debt is indicated with an arrow. The chart uses logarithms to make advances and declines of a given percentage occupy the same vertical space.
Most peaks in margin debt occurred a month or two before the S&P corrected, so it may pay us monitor debt closely and consider exiting the next time it declines.
The VIX Index returned to normal pricing on Friday before the holiday, and it remained so until last Friday when it suddenly plunged to 15% oversold. This will become a liability for the market if it persists more than a few days, but sudden drops in the VIX have often been ignored during the first week.
The VIX Volatility Oscillator has also started to increase, but at 79 it still has a way to go before giving a buy signal on the VIX Index and a sell signal on the market.
The Dow and S&P 500 Short Trend Indicators (STI) remain neutral while the NASDAQ STI continues positive into its third month. All three Swing Indicators (SWI) are far below zero, but they have started to slow their decline and may provide support for the markets in the next few weeks.
Indicators improved considerably last week. They traveled from 21 negative, 8 neutral and 0 positive on the Friday before the holiday, to 7 negative, 17 neutral and 5 positive at the close of last week. That's a change by 19 indicators in just four days.
This was enough to reverse the Summary Index from its low of 2.90 on Thursday to 3.55 as the week ended. The SI will move above its buy signal trigger at 4.50 at the close Tuesday, even if there are no further changes in the indicators. This will produce a regular Summary Index buy signal, the first since February 22.
The S&P 500 200-day moving average (green line in the chart above) gained 5.75 points over the last five sessions to 2673.63, while the 50-day moving average (blue line above) added 6.94 points to 2723.91.
This has been a marked positive reversal for the 50-day average following its precipitous decline the week before. The S&P spent one day below its 50-day average and is now trading 36 points above it.
The Trend Indicator (TI) (pink line below) has not yet recovered. It lost 0.26 points last week to 13.03, but that is a nearly 50% improvement over the prior week. It continues to be in the Uptrend state.
The S&P 500 14-day Relative Strength Indicator (RSI) turned negative when it fell below 30% last week, but it has returned to 45% and will be at 52% when the week ends, if the S&P simply remains unchanged.
The S&P 500 Price/Volume Chart is now well positioned for a classic clockwise basic buy loop. A minor advance on a little more volume will complete the buy loop Monday and confirm it on Tuesday, just in time coincide with the anticipated Summary Index buy signal.
The Average Signature has once again failed to fall low enough to trigger a buy signal when it reversed. It continues to be neutral.
Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. To send Fred your questions or comments, click here: Fred@MarketMonograph.com. E-mail sent to Fred may be edited for clarity and brevity and published on this web site, and may include your name unless you request anonymity or specify not for publication. The charts and commentary represent what Fred thinks about the market and what he is thinking of doing for his own account and for accounts he manages at the time of writing. Fred, his clients, or his family may have positions or may make trades in securities mentioned in these commentaries. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information. Copyright©2001-2018 Fred Goodman. All rights reserved. For information purposes only, offered as a periodical of general circulation; not to be deemed to be recommendations for buying or selling specific securities or to constitute personalized investment advice. Derived from sources believed to be reliable, but no warranty is made as to accuracy.