Technically Speaking, I’m a Little Worried

I consider myself a sentiment trader. Which is, of course, a very highly technical term that I made up to describe my investing style. For, while fundamentals are at the core of every position I have, there’s a lot of opportunity to increase returns with some opportunistic trading.

I base all my opportunistic trading around my own internal compasses’ gauge of sentiment. And, as those who read my work know, while I’ve been very bullish on all the companies in my portfolio, since the first of the year, I’ve been rather cautious about the overall market. Investor sentiment was simply too bullish. And, it’s not about the level of sentiment that drives prices, it’s the incremental changes thereto. It had to go down, which it did.

The last few weeks have seen a nice little rally in the market. I think it caught a lot of investors by surprise, coming on the heels of a potential trade-war induced selloff. This morning, however, my gut was telling me that we are about to be in for some rocky sledding.

Lately I’ve noticed several disturbing trends. Volumes are weak. Stocks rally on good news, but then give back the gains over the next few days. Investors I speak with seem a little distraught by the action in their stocks. I pulled up a chart of the S&P and it worried me a lot…

Now, I’m not the best technician in the world, but I can draw trend lines. If the trend lines run parallel to my overall thinking, they can be great confirmation. My thinking lately is that moves in the market should be faded, and this chart really confirms that the recent upswing was likely a selling opportunity.

I sent the above chart to a friend of mine and then sorta sat on it. My thinking was that it looked bad, but I might just be feeling grouchy from being tired. Maybe, I’m overreacting? This afternoon, however, I got some confirmation.

I consider Tim Ord to be one of the better technical analysts that I follow. This afternoon, Tim came out with a sell on the S&P. What follows below are his charts and words.

“We do a lot of work with the Tick and one study we have been working is in the top window in the chart above which is the 20 moving average of the tick. In general the 20 MA of the tick stays above “0” in uptrend and below “0” in down trends. The red circle area shows the times when the 20 ma ticks fell below “0” which also happen today. The turning down of the tick below “0” came at the time the SPY was testing the gap level of March 22 near the 270 range. There are bearish signs present. Short SPX on 4/19/18 at 2693.13.

If that wasn’t enough, around the same time I received the latest piece from Kevin Muir, the MacroTourist. As readers know, I believe Kevin is the best trader out there and, when he speaks, I listen. Here’s what he said…

“One last chance to sell? All I can say is don’t hold out for peak P/E multiples. They probably hit their high right before the tax cut. The market will be a lot less optimistic about future growth.

It’s a delicate dance between how much EPS can grow in the meantime before the economy finally rolls over. Colour me skeptical that growth will exceed expectations. This last round of corporate tax-cut fueled buy-backs might be the best chance to write some sweet pink tickets.”

The best sentiment gauge, maybe even better than my gut, is the VIX. We are in a world of increased volatility and it will likely be a very long time before it trades back to single digits. However, it has reached a level that suggests complacency.

Throw it all together, and I’m concerned about the market in the near-term and am increasingly fearful that if we break out of range trading it will be in the downward direction.

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2 COMMENTS

  1. I just started investing in the stock market in December of 2017. I’ve been around a while, I will be 55 this year, so it’s not like I don’t know anything about investing, I have always paid attention to economics. I feel there in s a new breed of trader today who is sparking uncertainty in the markets. They want to be financially successful quickly and they are flipping everything for small gains causing long traders stock values to fall quickly. Maybe it has been like that for years, but with so many people (impatient rookies) being able to trade for free with apps like Robinhood I think it invites a lot of volatility to the market. Look at StockTwits with all the whining and complaining about stocks they are invested, they expect to make thousands of dollars in a few day.

    • For being new to investing, you’ve caught on to this very quickly. It’s amazing that investors complain so much. 20% returns are whined about…but what are the long term returns of the market? Well below that. If you take a long view and buy quality on weakness, you’ll do great. If you trade a lot, the game is much tougher. Small amounts of money can be moved around quickly, but larger sums will eventually get caught on the wrong side and that’s a problem. Thanks for reading and for your post.

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