The Big Wave Trading models have undergone some near term volatility in operation signals in a few indexes but remained the same in a few others. The SP-500, Nasdaq 100, and DJIA switching back to operational BUY signals with each index hitting new 52-week highs. However, the NYSE and Nasdaq failed to confirm these other indexes, keeping these indexes under a NEUTRAL condition. On top of that, the Russell 2000 maintained its SELL signal all week long and on Friday gave a confirmation SELL signal. If you want to know what a difficult tape to trade looks like, this is it. When you have multiple indexes moving in opposite direction in a confusing manner with internals not confirming the move to new highs, you are going to get chopped up.
That continues to be the theme for EOD trend followers. If you are not daytrading, you are probably having a difficult time with your recent long selections. There is no rhyme or reason to what works and what fails lately. The one theme that is obvious to us is the success in our long signals related to the DJIA. outside of these stocks, our win/loss gain/pain ratio looks rather horrible the past couple of weeks. Some mental trading mistakes were made on our end in anticipation of a harsh quick sell off that failed to materialize from the overbought conditions in every major index/ETF we track.
While we are coming off the overbought conditions on all of our major indexes, there is not one index or ETF we track that is oversold. This, along with all the negative internals we have in the market (ADV/DEC line, NH/NL, High Yield, II bears, AAII bulls, low VIX) does not historically bold well for big market returns without some extreme volatility along the way. Until we see the market start to find a floor and our four major osciallators that we follow start to turn higher, we will continue to hold hedges against our long positions via index ETF Puts or inverse leveraged index ETF Calls and we will operate on a reduced position size with new long signals.
The market is too mixed here with the DJIA leading. The Russell 2000 is not leading. So no matter how excited you are about stocks being at new highs here you are failing to see the internal problems that can lead to an ugly quick market sell off. While we remain very long, we still have plenty of hedges in place to take advantage of a decline here. We will be fast to leave our long positions that give sell signals, if the market does in fact deteriorate here.
If the market gets oversold, we find a floor in the Russell 2000, we get a Follow-through Day, and leading stocks give me long signals, then I will increase my position size in anticipation of a further market rally. Until that happens, caution is best observed here even with the DJIA, SP500, and Nasdaq 100 in new high ground. The more broad indexes like the Nasdaq and NYSE still aren’t in new high ground. This is yet further proof this rally is narrow. Your biggest proof to the narrowness of this rally can simply be found by taking a look at that daily/weekly chart of the Russell 2000. If we can get above the intraday highs of 9/3, we will gain a favorable view of the RUT. Until then, caution is warranted here, even with the big-caps hitting new highs.
Have a wonderful rest of your beautiful weekend. I wish you all the best during this upcoming historically seasonal worst week for the stock market on a 5-day return going back to 1950. These next two weeks are in fact two of the 10 weakest weeks seasonally for the stock market going back to 1950. Trade accordingly. Thank you. Aloha.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE OUR SIGNAL DATE – DATE OF SIGNAL
VIPS long – 484% – 7/17/13
HEES long – 249% – 9/4/12
AER long – 155% – 6/27/13
TPL long – 133% – 10/22/13
WDC long – 124% – 1/9/13
USCR long – 87% – 4/12/13
OVAS long – 48% – 8/8/14
ENPH long – 35% – 8/14/14
VDSI long – 34% – 8/4/14
