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Hold Them or Fold Them?

Monday, November 26, 2018
Fred Goodman
The market is approaching potential support.

AT A GLANCE: As a result of the last four negative days the market is approaching 2600, where four recoveries have gotten started this year. The Summary Index and several other indicators have fallen to levels from where reversals have traditionally occurred. It's likely that it will be do or die for the market as the year comes to its conclusion.

When trades are found for the Discretionary GPS Portfolio by the Goodman Price/Volume Stock Selection System (GPS), they will be listed here. Mental stop losses are updated every week.

You can check the current mental stop losses for all positions held in the portfolio by clicking here.


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Trading Notes

As stated in our special e-mail last Tuesday morning, instead of buying 100 shares of SPY and QQQ for our traditional Thanksgiving speculation, we bought one SPY December 31, 267 call and one QQQ December 31, 161 call to reduce our level of risk.

As it turned out the decision was a good one since both positions moved lower since then. We will close the trades out near the close Monday unless there's a substantial rally that pushes the S&P 500 above last Tuesday's close at 2641.89. If that should occur, we'll hold them a few more days with a mental stop loss at that level.

As of Friday's close we have a combined loss of $142 from the two options, while 100 shares each of SPY and QQQ acquired at the same moment the options were bought would have us down three times as much ($443).

The stock market is brushing against recent support levels, which suggests a bounce is possible at any time. However, the indexes have a lot of work to do before any sustained move higher can be expected. It is likely that the volatility will continue while the Trend Indicator (TI) inches higher after its slide into the Downtrend state.

The Quick Summary index sell signal is still in effect, but positive indicators fell to 3 a week ago, making a reversal to a QSI buy signal possible at any moment.

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 Dow Transportation & Industrial indexes finished Friday in their most bullish arrangement, T+I-. Following this arrangement in the past, the S&P moved higher the next day 60% of the time since 1971. However, NASDAQ & S&P 500 finished N-S--, which is usually followed by a decline (52% of the time).




Taken together, the combination of these arrangements has been followed by average performance the next day -- an advance 53% of the time.

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 only positive I can see in the chart of 2018 is the double bottom made by the S&P 500 within a few points of its rising trendline. The chart suggests the possibility of a bounce off support.

S&P 500 -- June to November 2018
Through Friday, November 23, 2018

The view of the intermediate and long term is clouded by the low reached by the R-squared (R2) indicator at 95.14% on Friday. This was a new low since October 20. The indicator advanced every day between March 1, 2017 and September 25 of this year, when it turned lower just 6 sessions before the S&P 500 reached its all-time high. As we pointed out at the time, when the indicator turns down it suggests the trend is ending, so it's a good idea to tighten stops and prepare for the worst.

You can find details in our October 1, 2018 report, but in brief, last week's new low again links the current market decline to the major declines following highs by this indicator in 1966, 1973, 1981, 1987, 2000 and 2007. Timing has not been precise. The R2 indicator can linger close to its highs for months before tuning lower, but it can also happen immediately.

S&P 500 Historic Trends Measured by the R-squared
Through Friday, November 23, 2018

Another indicator casting doubt on a continuation of the bull market, is the potential for a Dow Theory sell signal. The Dow Transportation average fell to a new low in October but it was not confirmed by the Dow Industrials. However, the Industrials made a new interim low last week at 24285.95, and if it falls another 750 points to 23533.20, it will produce a new sell signal.

Dow Industrial and Dow Transportation Stocks
Through Friday, November 23, 2018

On the positive side, the weekly survey of members of the American Association of Independent Investors (AAII) revealed 47.1% of them are bearish. If another 1% turns bearish in the week ahead the chart below will earn a black marker. In the past, markers have often occurred just as a market decline was ending, or at least, just before a bounce was getting started.

AAII Bears
Through Friday, November 23, 2018

The opposite was the case on January 26. The percent of bullish AAII members reached a high that earned a black marker in the next chart. This suggested that the rally was about to end, and it occurred on the very day the market made its final high, a high that held until August.

AAII Bulls
Through Friday, January 26, 2018

The 20-day buy signal by final hour of trading indicator ends Tuesday. The S&P 500 will have pick up eight points to close above 2641.25 by then for the signal to become profitable. The Indicator's 5-year win ratio of 83.9% will slip to 81.3% if it fails to do so.

Dow Industrials final hour trading -- Previous buy signals
Through Friday, November 23, 2018

The 20-day buy signal by the Dow opening thirty minute indicator has until Friday to prove itself, but the S&P will have to gain just over 100 points to accomplish it. This indicator's win ratio is currently 73.3% with four failures against 11 successes in the last 5 years.

Dow Industrials first 30 minutes-- Previous buy signals
Through Friday, November 23, 2018

The S&P 500 MACD indicator reversed to a sell signal at the close Tuesday. As we have mentioned, interruptions of buy signals following major corrections are frequent, but serious declines in the S&P following interruptions are rare. There have been frequent tests of previous market lows, but they have rarely been followed by significant new lows.

The impression we get of the market at this juncture includes a short term bounce to test the upside followed, in the event of a failure to establish a new high, by a renewed and more dangerous decline to test the 2600 level.

S&P 500 MACD (Moving Avg. Convergence/Divergence)
Through Friday, November 23, 2018

The number of S&P 500 stocks with positive MACDs fell below 50% last week to 207. Based on the indicator's past, it is more likely that positive stocks will increase in the week ahead, rather than fall below their October low.

Number of S&P 500 stocks with positive MACDs
Through Friday, November 23, 2018

Economic Indicators

There's a lot of positive economic news, but the housing market is clearly not part of it. To skip to the technical indicators, please click here.

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There is no question that the housing market is leading the way down. It has been slipping slowly lower since the year began. The Housing Market Index (HMI) of the National Association of Home Builders (NAHB) -- which is based on a monthly survey of its members' expectations for the industry -- came close to a 20-year high when it reached 74 last December, but since then it has slipped to a 2-1/2 year low of 60.

The 3-month moving average reached 65 in November to tie its September 2017 low. This is of concern, since in 2000 and 2007, significant stock market declines occurred within months of HMI highs.

National Association of Home Builders Index
Through November 2018

Housing starts continue to grow at the respectable year-over-year rate of 3.6%. However, the number of new permits continues to decline. Permits are now falling more rapidly (3.8% year-over-year) than the rate at which new houses are being started (maroon dot near the bottom of the chart).

Housing Starts and Permits -- Year-over-year
Through October 2018

Year-over-year annual growth in sales of existing homes is now shrinking at a 3.98% annual rate, the lowest rate since 2014, according to the National Association of Realtors. Inventories are growing by almost 1% annually and prices have weakened, although they are still increasing by almost 3% annually.

Existing Homes -- Sales and Price
Through July 2018


Technical Indicators

The VIX Volatility Oscillator fell sharply towards its midline last week. This is surprising considering the drop in the markets as they approach recent lows. Investors apparently expect the market to hold above 2600. The apparent neutrality of most of our other indicators also suggests that the low may hold, at least for the near term.

VIX Volatility Oscillator Buy and Sell Signals for the VIX Index
Through Friday, November 23, 2018

All three Short Trend Indicators (STI) remain neutral, but the Swing Indicators (SWI) are split, with the Dow SWI below zero and both the NASDAQ and S&P 500 SWIs in positive territory. The S&P recently gave a combined buy signal and the Dow is within a day or two of giving one. However, the NASDAQ cannot join them unless it first falls sharply and then recovers..

S&P 500 Trend and Swing Indicators
through Friday, November 23, 2018

Volatility continues to affect the indicators. The number of negative indicators fell from 22 to 3 two weeks ago and returned to 17 last week. The Summary Index is still working under a Quick Summary Index (QSI) sell signal from two weeks ago, but since the positive indicators fell to 3 two weeks ago and returned to 6 on Friday, a QSI buy signal will occur if just two more indicators turn positive.

We now have 13 negative, 10 neutral and 6 positive indicators. The SI finished the week at 8.95 and will fall to 7.95 this week if there are no further changes.

Technical Condition of the Market -- 2016 chart follows the current one
through Friday, November 23, 2018 >>Learn more


The S&P 500 200-day moving average (green line in the chart above) turned up on Friday. It lost just 0.09 points to 2760.73 in the last five sessions, and it will move higher Monday unless the S&P falls by more than 21 points.

The 50-day moving average on the other hand (blue line in the chart above), dropped 21.60 points last week to 2793.83, the biggest decline in any week since last April. The averages are now just 33 points apart and are approaching each other at the rate of 21 points a week.

At this rate there will be a "death cross" in seven sessions, even if there are no changes in the S&P between now and then. The last death cross occurred in January 2016, halfway down to its February low at 1864.78 from its November high of 2109.79. (Note the last dip below the pink horizontal line below.)

The Trend Indicator (TI) (pink line below) is still in the Downtrend state, but it gained 0.24 points last week to 10.27. It is two weeks away from a return to 10.75 and the Uptrend state.

Trend Indicator Long Term History
through Friday, November 23, 2018 >>Learn more

The S&P 500 14-day Relative Strength Indicator (RSI) was halted in its tracks at just over 60%, and it fell back to 37.4% on Friday. It will continue falling to 18.3% and turn negative this week unless the market reverses.

S&P 500 with the Relative Strength Indicator (RSI)
through Friday, November 23, 2018

The S&P 500 Price/Volume Chart completed a bearish, counterclockwise false reversal last Monday and confirmed it the next day. The market continued to decline on low holiday volume, but there's a chance it will be reversed this week when volume returns to normally higher levels.

S&P 500 Price/Volume Chart
Volume = Total of Individual S&P Stocks
through Friday, November 23, 2018 >>Learn more

The Average Signature is still neutral, but it has fallen to 565. It is within striking distance of 500, from where positive reversals have occurred.

Average Signature -- Traditional Method 345 and 645 Triggers
through Friday, November 23, 2018 >>Learn more

Average Signature -- moving averages of the percent > 700
through Friday, November 23, 2018

Average Signature-- Traditional Method 20-day average
through Friday, November 23, 2018 >>Learn more

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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.