Yellow Flag Flying: ETF Regime Change
Courtesy of John Nyaradi’s Wall Street Sector Selector
On Friday we switched to “Yellow Flag Flying” mode, expecting choppy to higher prices ahead for the short to medium term.
Support at the all important 1040 level on the S&P 500 held last week and was followed by a sharp rebound from very oversold levels. Resistance lies just ahead at 1107 on the S&P 500, the 200 Day Moving Average, and so one of two things could happen next.
If upward momentum can be sustained and prices go through and hold above the 200 Day Moving Average, I think we can see much higher prices ahead in a summer rally. If the next test of the 200 Day Moving Average holds, then we’re very likely looking at some choppy price action between 1100 and 1040.
Looking at My Screens
On Friday we entered some “long” positions in all portfolios and had some good immediate results with the following unrealized gains after one day’s action:
Standard Portfolio:
- Position #1: +1.7%
- Position #2: +2.2%
- Position #3: +2.1%
- Position #4: +1.9%
- Position #5: Cash
2X Portfolio:
- Position #1: +3.8%
- Position #2: Cash
Option Master Portfolio:
- Position #1: +6.3%
Year to date, our portfolios look like this:
- Standard Portfolio: +9.1%
- 2X Portfolio: -15.9%
- Option Master Portfolio: +53.3%
- S&P 500: -2.2%
I have been offering the Option Master Portfolio free of charge to Standard and Pro Members and am developing pricing and a program to offer it to the entire membership within the next couple of weeks. I’ll keep you informed of these developments and when it will be available. While not suitable for everyone, this is a very exciting trading program and one that seem’s well suited to today’s fast moving markets.
The View from 35,000 Feet
Friday started weak and ended strong which is usually synonymous with bull market action, although we still remain below the 200 Day Moving Average and so for the short term, at least, the trend remains down.
However, my signals are pointing to renewed strength in the market internals and the possibility/probability of higher prices ahead which is our reason for switching to “Yellow Flag” mode.
For the week, all major indexes were up with the Dow leading the way at +2.8% and economic news was mixed.
On Friday, retail sales were reported as declining -1.2% versus an expected gain but consumer confidence rose to the highest level in 2 1/2 years.
The crisis in Europe moved to the back burner as the European Central Bank says they’ll continue buying bonds to support the troubled nations in their group.
On the negative side of the ledger, the ECRI, Economic Cycle Research Institute reported that their weekly leading index hit a 44 week low and dipped below “0” for the first time in over a year to the lowest level since July, 2009. This would indicate dramatic slowing of the U.S. economy in the months ahead.
However, short term, market sentiment remains bearish which is bullish in the perverse way that markets work.
Further indications of the small investor abandoning the stock market comes from last week’s report that Morgan Stanley is closing 300 offices and laying off 1200 employees due to declining business in their retail sector. This would be like McDonald’s not being able to sell cheeseburgers and represents the small investor voting with their feet in response to continued gut wrenching volatility in global equities markets.
What It All Means
It’s a shame, in my opinion, that the small investor has left the equities market and in the process created a huge bond bubble that will one day surely burst as all bubbles do.
No doubt the volatility is uncomfortable but for those armed with a solid trading plan, more opportunities than ever exist in today’s market. In my opinion, the old rules of “buy and hold” and “invest for the long term” have been rescinded, at least for now, and looking at the fact that the major indexes are well below their peaks of eleven years ago, it’s likely that they’ve been dinosaurs for many years already.
For the short term I see the probability of higher prices and possibly even a “summer rally,” followed by more downwards pressure moving into the autumn.
2nd Quarter earnings season is about to start and all expectations are for it to be solid. However, in a few weeks, the Census workers will be laid off and so we likely will see weakness in employment while mid-term election years are typically poor times for the equities markets. Also, I don’t think the European contagion is behind us yet and could easily resurface in a few months.
Therefore, I think the strong possibilities of lower equities prices and even a double dip recession lie ahead. But for the moment, this looks like a time that could be for making hay while the sun is shining.
The Week Ahead
Some important economic reports this week, particularly from the housing industry and industrial production on Wednesday and the start of earnings season with bellwether FedEx on Wednesday.
Economic Reports:
Tuesday: June Empire Manufacturing
Wednesday: May Housing Starts, May Building Permits, May Producer Price Index, May Capacity Utilization, May Industrial Production
Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, May Consumer Price Index, May Leading Indicators, June Philadelphia Fed Report
Earnings Reports:
Tuesday: Best Buy
Wednesday: FedEx
Sector Spotlight:
Laggards: Short Financials, Short Europe, Short Small Caps
Leaders: Spain, Real Estate, Australia, Italy
Summer has finally come to Bend as cold and rainy days gave way yesterday to dazzling clear skies and sunshine. I went out for my first fly fishing day of the season on the Deschutes River, where the weather delayed salmon fly hatch was on. Salmon flies are these big, prehistoric looking bugs that hatch in the bushes and trees and then fall into the river where the trout lay in wait and the fishermen wait for the trout.
It struck me that fly fishing is something of an odd sport. Grown men standing in a river, waving a stick and trying to fool a fish into thinking they’re a bug. But no more odd, I guess, than chasing a white ball around a course or a few hours at a time.
Let’s make this summer a great one.
Wishing you a great weekend wherever you may be,
John
John Nyaradi publishes Wall Street Sector Selector, an online newsletter specializing in sector rotation trading using Exchange Traded Funds. John is offering PSW readers a 30 Day Free Membership and Free Special Report, "Slay the Dragon Within: How to Make Your Emotions Work for You Instead of Against You." His service provides signals for going long and short using standard and leveraged ETFs. Free Membership Subscribers also get access to the Wall Street Sector Selector Monthly Webinar and a second Report, "How To Avoid the Buy and Hold Trap." – Ilene
