Give Thanks for Thanksgiving
Our mental stops for SPY and QQQ have continued to move higher in spite of the negative market last week. They are now at 304.13 and 196.82. (The stop for ITB (iShares Dow Jones US Home Construction Index ETF remains at 41.95.)
We have been looking for
an opportunity to increase our equity position from 34.1% to 50% and
will use our annual Thanksgiving speculation to do so. For the
sample portfolio below we'll increase our positions in SPY and QQQ by
roughly 50% near the close Tuesday, but we will not sell at the close
Friday. We'll hold our positions until stopped out, or scared out by
changes in our indicators.
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 Averages closed T++I+ Friday while
the NASDAQ & S&P 500 Indexes closed N+S++.
These arrangements have been followed the next day by S&P gains
55% 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 are updated each week so we can follow the results going forward. Additional explanatory material is posted here, here and here.
General Market Comment
We have good news and bad news to report.
Let's start with the good news. Even though the market lost ground for the first time in seven weeks, volume was the lowest since Labor Day. Volume is always low during Thanksgiving week since there's no trading on Thursday, and just a half a day on Friday, but volume this low is not typical for the week before the holiday.
For perspective, last week's volume in S&P 500 stocks was 17% below its 50-week average. Low volume during a market decline is unusual, and it is generally a bullish sign when it happens. The reverse is what we usually see.
Also encouraging, was the fact that the Growth/Value Oscillator, which is based on the relative performance of stocks included in the Russell 2000 Growth and Value Indexes, has recovered from its decline. It earned a yellow marker last week when the total money invested in growth stocks once again exceeded the investment in value after falling sharply in early September.
The Dow final hour of trading indicator gave a new 20-day buy signal Thursday when it fell sharply lower. It has generated 34 profitable trades out of 41 buy signals since 2013. That's an 82.9% success ratio that places it among the most profitable 20-day indicators we follow.
Now the bad news.
The Semiconductor index (SOX) is a bit sobering now that its SOX/S&P ratio (pink line below) has turned sharply lower. The ratio has led the market up and down for years. We will watch it closely going forward.
Another negative was the decline by the MACD Indicator on Thursday that placed it below its signal line (red-dashed line below). To make it worse, it failed to reach a new high above its July close at 34.28 before turning lower. There is still time for the MACD to reverse and reach a new high, but for the time being it is negative.
The number of positive MACDs among the stocks in the S&P 500 fell again last week. It is now below the 50% level at 230.
The best and most consistent seasonal trade we've found is a buy on the Tuesday before Thanksgiving and its sale at the end of the year. In addition, if you're willing to risk a day trade, by selling on Friday near the close and buying it back at the close on the following Monday, you can squeeze out a little better result.
Further analysis of the data reveals that since 1999, when a Summary Index buy signal was in effect as it is currently, there was a 30% increase in profitability
Here's a summary of the results since 1952.
The Tuesday to Friday trade produced profits in 57 of the 67 years since 1952. The win ratio of 85.1% includes 10 losing years (1964, 1987, 1990, 1991, 1995, 2000, 2006, 2009, 2011 and 2018). However, in 7 of the losing years the market advanced on the following Monday.
Had one held on to the 10 losing trades for one more day, until the close Monday, six of them would have become winners. Of the other four, one improved and three got worse on Monday.
The three that got worse by holding until the close Monday were 1964, 1987 and 2006. The damage was not severe in 1964 or 2006, but in 1987, the year of the October massacre, the S&P 500 lost 4.2% on that Monday and lost 31% in four days.
Our trade this year is designed to increase the size of our current position. We will not initiate the day trade and step out of the market Friday and reenter at the close Monday. However we will closely monitor our stop losses.
With respect to the 10 years out of 67 when the trade was down near Friday's close, it is interesting to note that in 7 of those 10 years the trade would have yielded a profit if held until the end of the year. Only in 1964, 2000 and 2018 would they have been unprofitable. Even 1987 would have yielded a small profit if the Thanksgiving trade had been held until New Year's Eve.
For an extended discussion of the Thanksgiving trade, look at last year's discussion here.
One reason the market remains strong is the release of favorable economic indicators. The Michigan Consumer Sentiment Index and the preliminary evaluation of the ISM Purchasing Management Index serve to illustrate the point. Not only did they strengthen the market last Friday, but they aggravated to no end those trying to discourage the public for political reasons. To skip to the technical indicators, please click here.
The Michigan Consumer Sentiment Index (dark blue line), which is based on a survey of 600 households, includes two measures of confidence -- current conditions and expectations for the future. Both measures increased in the last three months after steady declines from the highs reached in April 2018.
The ISM Manufacturing Index fell below its important 50% level last August, after a long slide from a 15-year high reached exactly one year earlier. However, investors were cheered Friday when a preliminary report came out showing that the advance in October is likely continue in November.
Existing home sales were up in October, and inventory was way down at a 3.9% annual rate, according to the National Association of Realtors.
Housing starts recovered in October after slipping the month before. At the same time, permits increased to a three-year high. The improvement has been reflected in the iShares Dow Jones US Home Construction Index ETF (ITB).
The VIX Index continues to accurately reflect estimated risk, but the VIX Volatility Oscillator remains very low. It is producing frequent red markers that have often been associated with stagnant, or mildly bearish, stock market activity.
The most recent red marker was earned Monday and was followed by a small dip in the S&P 500. The green markers, in distinction, have been associated with significant, and usually positive, moves by the S&P.
The S&P 500 Short Trend Indicator (STI) has been positive for a month. It will continue positive this week unless the S&P falls more than 50 points. The Swing Indicator (SWI) is also likely to remain positive. While the STI is positive, a combined sell signal cannot be produced even if the SWI turns negative.
The NASDAQ and Dow STIs and SWIs are telling the same story.
The October 11 Summary Index regular buy signal was never canceled, but the number of positive indicators fell to 1, and the negative indicators grew to 15. The indicators are now arranged 15 negative, 13 neutral and 1 positive.
What saved us from a Quick Summary Index sell signal was the failure of the negative indicators to fall to 3 before increasing beyond 7. The existing buy signal will be reconfirmed as a QSI buy when positive indicators reach 7 or more. However, if the SI falls below its buy signal trigger at 4.5 before reversing and moving higher, a new regular buy signal will be established.
The SI finished the week at 7.15 and will reach 4.95 in five days if there are no further changes in the indicators.
The S&P 500 200-day moving average (green line in the chart above) added 9.78 points to 2919.08 while the 50-day moving average (blue line in the chart above) gained 11.78 points to 3017.69. The lead by the 50-day average increased slightly to 98.61.
The Trend Indicator (TI) (pink line below) fell every day last week. It finished at 14.27, down 0.17 for the week. Nevertheless, it will remain in its Uptrend state unless it falls below 10.75.
The S&P 500 14-day Relative Strength Indicator (RSI) fell into its neutral zone at 68.1%. It will remain in this area next week unless the S&P makes a significant move.
The S&P 500 Price/Volume Chart completed a bullish, clockwise false reversal. It must be confirmed Monday by an advance on higher volume. If this plays out, the Thanksgiving trade we will open Tuesday near the close should be a winner.
The NASDAQ Price/Volume Chart looks like that of the S&P 500, but its bullish, clockwise false reversal is invalid under to the remove one day rule. If one removes the high volume point, the loop is destroyed.
The Average Signature fell below 500. There are now two negative charts and one neutral, which places the overall rating between neutral and negative.
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©2001-2019 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.