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Technically Strong, Fundamentally Convalescent and Politically (#%)^!

Monday, October 12, 2020
Fred Goodman
Better safe than sorry.

AT A GLANCE: Rumors of a stimulus package for the airlines pushed the Dow Transports to a breakout on the weekly chart of the index. The Dow Industrials are now 965 points away from confirming a Dow Theory buy signal. Many other indicators have turned exuberant, but the political scene is putrescent and makes normal indicators unreliable. Cash is king.

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.


If you have questions about the GPS that aren't answered in our Frequently Asked Questions pages, please send your questions via e-mail.

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Trading Notes

Still fishing. We're waiting for a regular buy signal from the Summary Index and the results of the election.

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 head and shoulders sell signal completed two weeks ago, was canceled Thursday when the S&P 500 moved above its right shoulder.

With Regard to the stock market, the president's recovery pleased his supporters and even those politically neutral (in that Biden has promised to cancel the Trump tax cuts if elected). However, the uncertainty of the election, and the turmoil likely to ensue, regardless of who wins, still lies ahead.

S&P 500
Through Friday, October 9, 2020

The Dow Transportation & Industrial Averages finished T++I+, an arrangement that has been followed by a rally the next day 55% of the time. The NASDAQ & S&P 500 Indexes finished N++S+. This arrangement has a success ratio of 53% -- the average for all NS arrangements.

Since we introduced this indicator four years ago, the difference between NASDAQ/S&P arrangements has reverted to the mean. The S&P has rallied the next day 53% of the time since the beginning, but the differences between the six different arrangements have narrowed to plus or minus 3%. The Dow averages average 52%, but their differences are plus or minus 7%.



This week's combination has had a small edge (54%) over the average for any day selected at random since 1975.

In general, as you can see below, combinations have retained considerable significance in spite of the N&S reversion to the mean. The lowest probability for a rally the next day is 18% for the combination N-S-- & T+I++. The highest probability for a rally is 79% for the combination N+S++ / T+I-.

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 are updated each week so we can follow the results going forward. Additional explanatory material is posted here, here and here.


General Market Comment


The Dow Transportation Average broke above its weekly Broadening Top Formation last week. It closed at a new all-time high three hundred points above its last new high, which was reached two years ago.

At the same time, a Dow Theory buy signal is now in sight if the new transport high is confirmed by an advance by the Dow Industrial Average of 965 points.

Dow Transportation Average -- Weekly chart
Through Friday, October 9, 2020

The NASDAQ made a similar breakout seven weeks ago and confirmed it last week.

The S&P 500 will follow suit if it advances 53 points to 3530 and closes there on a Friday. However, the Dow must advance 2000 points and close above 30500 to join the others.

NASDAQ -- Weekly chart
Through Friday, October 9, 2020

The Smart Put/Call Indicator (SPCR) 20-day sell signal on September 8, ended with a 0.87% loss Tuesday. Another 20-day sell signal followed the next day.

The indicator remains our best performing sell signal indicator. It has a 60% success rate, with an average win nearly twice as large as its average loss -- 4.24% to 2.24%.

Smart Put/Call Ratio (OEX-CBOE) -- 20-day sell signals
Through Friday, October 9, 2020 >>Learn more

The longer term, CBOE Put/Call ratio, gave a sell signal on September 4 when it started to move up from a low. Its rise is slowing down and it will end its sell signal in a few days, when it turns lower.

CBOE Put/Call Indicator
Through Friday, October 9, 2020

The MACD indicator gave a buy signal on October 1 and continues to move higher. The S&P 500 is ahead by a bit more than 2% since then.

S&P 500 MACD (Moving Avg. Convergence/Divergence)
Through Friday, October 9, 2020

The number of S&P 500 stocks with positive MACDs has swung from 59 to a surprising 459 in two weeks. It broke the downtrend line and moved above two recent highs after doing so.

Number of S&P 500 stocks with positive MACDs
Through Friday, October 9, 2020

The recent MACD 20-day buy signal has a record of 31 wins against 13 losses. Unfortunately, the losses have been nearly twice the size of the wins. However, the September 21, 20-day buy signal is ahead by 5.9%, nearly twice its average win.

MACD 20-day Buy Signal from a low level of positive MACDs
Through Friday, October 9, 2020


Economic Indicators

There weren't many economic reports released last week, but two were notably positive. To skip to the technical indicators, please click here.

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Wholesale sales recovered from a low of -11% year-over-year, two months ago, to within 2% of their pre-pandemic levels. Meanwhile, inventories are down 6%, which suggests that manufacturers must increase production in the months ahead. This should help the ISM Manufacturing Index continue its very sharp recovery.

Wholesale Inventories to Sales Ratio
Through August 2020

Alongside the ISM Manufacturing Index, the ISM Services Survey (formerly Non-Manufacturing Index) is still humming along at 57.8%, well above the 50% level where it first reflects expansion.

ISM Services Survey
Through September 2020


Technical Indicators

When the market rose last week, the VIX Index fell as expected. However, it probably fell more than it should have, considering the lack of stability and the oncoming election. It is now 13% oversold, more so that at anytime since July.

The VIX Volatility Oscillator is now totally neutral, right in the center of its range. However, it fell so sharply Thursday that it is likely to continue to move in the direction of the red dashed line where it will give a sell signal on the S&P 500.

VIX Volatility Oscillator Buy and Sell Signals applied to the S&P 500
Through Friday, October 9, 2020

The three Short Trend Indicators (STI) continue to be neutral, but their Swing Indicators (SWI) are within a week of turning positive and producing combined buy signals if the market continues to move higher.

S&P 500 Trend and Swing Indicators
through Friday, October 9, 2020

The Summary Index (SI) finally broke out of its narrow range between 5.35 and 6.6, in which it has spent the last month. It finished the week at 11.95 and will reach its sell signal trigger at 17.00 by the end of the week if the rally continues.

The number of positive SI indicators reached 18 on Thursday. If they reach 19, a Quick Summary Index sell signal will become possible when they settle back to 16 or less. There were 4 negative, 9 neutral and 16 positive indicators at the end of the week.

Technical Condition of the Market
through Friday, October 9, 2020 >>Learn more

The S&P 500 200-day moving average (green line in the chart above) gained 5.24 points last week to 3117.02. The 50-day moving average (blue line in the chart above) gained 18.70 points to 3380.30.

The 50-day average managed to pick up another 13 points over the 200-day average. It is now above it by 8.47%, an 8-year high, and an all-time high in points at 263.78.

The Trend Indicator (TI) (pink line below) closed the week at 12.31 where it was two weeks ago. It regained the 0.20 points lost a week ago and will remain in its Uptrend state unless it falls below 10.75.

Trend Indicator Long Term History
through Friday, October 9, 2020 >>Learn more

The S&P 500 14-day Relative Strength Indicator (RSI) remains neutral in spite of a strong rally to 67.9%. It will remain at this level for the week if the S&P steady.

S&P 500 with the Relative Strength Indicator (RSI)
through Friday, October 9, 2020

The S&P 500 Price/Volume Chart moved in the bullish direction from the lower left to the upper right, but it failed to complete a buy loop because volume was 20% lighter than what was needed to penetrate the original downtrend line.

S&P 500 Price/Volume Chart
Volume = Total of Individual S&P Stocks
through Friday, October 9, 2020 >>Learn more

 

The Average Signature recovered to 945 last week. This is the second highest the indicator has ever been since 2005, when I first constructed it. The highest high was 952 on June 9, the day the first leg of the rally from the market bottom ended in a 5 week breather.

All three charts are now positive, but they are vulnerable to a pullback, as they were back in June. A sell signal will result when the indicator falls below 500.

Average Signature -- Traditional Method 345 and 645 Triggers
through Friday, October 9, 2020 >>Learn more

Average Signature-- Traditional Method 20-day average
through Friday, October 9, 2020 >>Learn more

Average Signature -- moving averages of the percent > 700
through Friday, October 9, 2020

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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©2001-2020 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.