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A Definite Maybe

Monday, May 6, 2019
Fred Goodman
Neutral indicators in a volatile market .

 

AT A GLANCE: Most of our indicators are neutral, which makes Quick Summary Index buy and sell signals more likely to occur than the more reliable regular signals. A QSI sell was produced last week, but another day or two like Friday will reverse it to a buy. Any positions held or opened in the days ahead should be protected by close stop losses.

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

Trading decisions are relatively uncomplicated when most indicators are neutral. We will simply wait until a majority of negative or positive indicators emerges. Unfortunately there is no trend. The market has been switching directions every couple of days and both the positive and negative indicators have recently dropped to 3 or less.

Three weeks ago the Summary Index had just one negative indicator. This set the stage for a Quick Summary Index sell signal when the number returned to seven or higher. This happened on Wednesday when the negative indicators reached ten, but the opposite is now possible, since the positive indicators fell to one on that day.

We'll continue to hold our position in QQQ and will add SPY to our holdings when the number of positive indicators exceeds seven. The stop loss for QQQ has increased to 184.51, the stop for SPY is now 288.18.

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 finished T++I+ for a sixth consecutive week. The NASDAQ & S&P 500 indexes joined it Friday when they also finished N++S+.




The S&P 500 has advanced 54% of the time the day after this combination has occurred, very close to the average for any day selected at random.

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 S&P 500 closed Friday 0.19 points below its last all-time new high after a gap opening and an advance of more than 29 points. This was likely generated by a surprisingly strong employment report released that morning. Nevertheless, just three of the 29 indicators making up the Summary Index closed positive Friday, and the new QSI sell signal that occurred two days earlier remains in effect.

With 19 neutral technical indicators, a mixture of both positive and negative economic indicators and a market hovering below the important psychological barrier at the round number of 3000, I see little reason to take on more than a modest position until these conflicts have been resolved.


The April 3, 20-day sell signal by the Smart Put/Call Indicator (SPCR) failed Thursday. This reduced the SPCR success ratio to 65.5%. However, a new 20-day sell signal will occur in the next few days, and it is more likely to be successful since the indicator just moved above the yellow line at 0.85, where most of the successful sell signals have occurred in the past.

Smart Put/Call Ratio (OEX-CBOE)
Through Friday, May 3, 2019 >>Learn more

The MACD indicator has also been affected by frequent market reversals last month. The indicator gave its first sell signal three days after it reached a high on February 26, and it gave a fourth sell signal Wednesday. Similar volatile periods have occurred at elevated levels in 2015 and 2016 (arrows), both of which were followed by pullbacks.

S&P 500 MACD (Moving Avg. Convergence/Divergence)
Through Friday, May 3, 2019

The scarcity of positive MACDs, among the S&P 500 stocks, continued last week. The high number for the week was 249 positive stocks, still under half of index, and they finished at 220 for the week in spite of the strong rally Friday.

Number of S&P 500 stocks with positive MACDs
Through Friday, May 3, 2019

Economic Indicators

To balance the very strong employment reports released on Friday, a few less encouraging reports are discussed below. To skip to the technical indicators, please click here.

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Margin debt naturally increases during market rallies, as traders borrow more and more to take advantage of advancing stocks. In the past, once the debt has topped out, sharp market declines have gotten underway, as was clearly demonstrated in 2000, 2007, 2015 and 2018.

The opposite has also occurred. Margin debt recovers quickly once the market bottoms out. However, the timing is different during recoveries. The market and the margin debt recover almost simultaneously with the market, as is evident below when both hit bottom at the end of December.

On the other hand, while the S&P 500 reached a new high four months after hitting bottom on Christmas eve, margin debt increased only slightly. It rose for two months but turned down again in March. Margin data is released with a one month lag, so we will have to wait to see if this small increase is significant, it certainly is not encouraging.

Margin Debt
Through March 2019

The ISM Manufacturing Index gave back all the gains it made since the election. The same is true of the eight Federal Reserve Districts according to reports released in the last several months. As illustrated below, the S&P 500 has generally fallen within months of a reversal of the Index from above 58%. The most severe stock market declines have occurred after the index fell below 50%. We are currently at 52.8% so all is not lost, but it is of concern.

ISM Purchasing Managers Index
Through April 2019

Following a massive rally in the price of lumber, prices have fallen more than 40% and now stand just above the critical $350 level. The stock market has not responded well when lumber sold for less than $350.

The decline in price is surely related to the health of the housing industry that has been weak for many months. However, the real concern is the frequent spread of weakness in housing to so many other related industries.

Lumber
Through October 2018

Technical Indicators

The VIX Index continues to rise along the trendline, which suggests further volatility and a likely correction.

VIX Index vs S&P 500 with markers for VIX Volatility Oscillator Buy and Sell Signals
Through Friday, May 3, 2019

The Short Trend Indicators (STI) remain positive, as are the three Swing Indicators (SWI). However, the SWIs are approaching zero and will arrive in a matter of days. While this is not likely to produce combined sell signals, since the STIs are likely to remain positive for another week, it is not positive for the short term.

S&P 500 Trend and Swing Indicators
through Friday, May 3, 2019

The Summary Index has fallen to 9.9. Unless there's a big change in the indicators this week, the SI will remain above 8, so it is not likely that a regular Summary Index buy signal will be generated. However, it will not take much of a rally to reverse the new Quick Summary Index sell signal to a QSI buy signal. Currently there are 7 negative, 19 neutral and 3 positive indicators, so just four more positive indicators are needed.

Technical Condition of the Market
through Friday, May 3, 2019 >>Learn more

The S&P 500 200-day moving average (green line in the chart above) gained 3.47 points last week to 2774.05. The 50-day moving average (blue line in the chart above) added 16.30 points to 2852.20, where it stands 78 points above the longer average.

The Trend Indicator (TI) (pink line below) reversed and lost 0.20 points to 12.16. It is still in the Uptrend state, but it will reverse to the Downtrend state if it slips below 10.45.

Trend Indicator Long Term History
through Friday, May 3, 2019 >>Learn more

The S&P 500 14-day Relative Strength Indicator (RSI) turned neutral last week when it fell into the 60s. It will remain there next week without a significant sufficient move by the S&P.

S&P 500 with the Relative Strength Indicator (RSI)
through Friday, May 3, 2019

The S&P 500 Price/Volume Chart completed an intricate bullish loop that requires confirmation. It will take a rally on higher volume Monday to do so.

S&P 500 Price/Volume Chart
Volume = Total of Individual S&P Stocks
through Friday, May 3, 2019 >>Learn more

If the Dow rallies Monday it will complete a bullish loop resembling a bullish clockwise false reversal. To complete the loop it will require an advance of around 50 points on a bit more volume than was traded Friday.

Dow Price/Volume Chart
Volume = All NYSE Stocks
Through Friday, May 3, 2019 >>Learn more

The SPDR Gold Trust (GLD) Price/Volume Chart will complete a basic buy loop with a small advance along the green arrow, but it will not be valid under the remove one day rule.

SPDR Gold Trust (GLD) Price/Volume Chart
through Friday, May 3, 2019

The Long Term Price/Volume Chart for GLD shows why the remove one day rule is important. The long term chart, which uses the 5-day averages of price and volume, reveals that a clockwise continuation sell loop was completed and confirmed instead of the clockwise buy loop produced by the one day chart.

This was the second continuation loop produced since the counterclockwise sell loop was completed in March.

SPDR Gold Trust (GLD) Long Term Price/Volume Chart
through Friday, May 3, 2019

Also reflecting the lack of strength in precious metals, the iShares Silver Trust (SLV) Price/Volume Chart completed a three-day buy loop that is always invalid under the remove one-day rule.

iShares Silver Trust (SLV) Price/Volume Chart
Volume = Published Daily Total
through Friday, May 3, 2019

The failure of the three-day buy loop completed by SLV was confirmed by the recent continuation sell loop completed by its long term P/V chart.

iShares Silver Trust (SLV) Long Term Price/Volume Chart
Volume = Published Daily Total
through Friday, May 3, 2019

The Average Signature continues to be weak. It is about to slip below the 500 level from where a positive signal may be generated by the next rally. In the meantime, the indicator remains neutral.

Average Signature -- Traditional Method 345 and 645 Triggers
through Friday, May 3, 2019 >>Learn more

Average Signature -- moving averages of the percent > 700
through Friday, May 3, 2019

Average Signature-- Traditional Method 20-day average
through Friday, May 3, 2019 >>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©2001-2019 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.