The Big Wave Trading Portfolio is operating under a SELL signal. However, do not let the term SELL fool you. Big Wave Trading as a whole is not bearish on the stock market just yet. Our model is simply on an operational SELL signal taking into account all of the heavy recent distribution days and the fact that the markets are still not in oversold conditions on longer-term daily and weekly time frames.

This being said, as long as interest rates are not rising, we believe that the prudent methodology is to look for an oversold level in the stock market and wait for a follow-through day to begin operating on the long side in size. The recent market decline has been ongoing in the Russell 2000 for quite some time so we will begin to look at this index for any possible market floor. While the selling was extreme on Thursday with down volume eclipsing up volume by 9 to 1, Friday’s gains were still only moderate making for an “inside” day on the indexes.

The good news for the bulls here is that the market did not immediately follow through on the 50 day moving average violations in the SP-500 and the Nasdaq. That is one positive sign that the selling might be exhausted short-term. The other sign is that the down volume eclipsed up volume 9 to 1 indicating short-term selling exhaustion. The other good news can be found in individual stocks.

The fact that we still have many long holdings trending higher, we are still getting some long signals, and some stocks we missed out on like GPRO are showing no signs of selling are all other positive signs that this might just be another pullback and not a full blown bear market. If this sell off was hitting every leader like GPRO, FB, TWTR, BITA, and VIPS and these were all now trading below their 50 day moving averages then I might be more worried. As it is, we were very overbought following a low volume rally that placed us in very extended territory from most major market indexes 200 day moving averages and we needed to pullback. That is the bottom line.

As we begin to get more oversold and potentially hunt for a floor looking for a FTD we have seasonality about to work in our favor also. The market axiom “sell on Rush and buy on Yom” has wrung true this year and the past week has seasonally been the worst week in the stock market going back to 1950. Next week is not favorable either as the 9th worst week on record going back to 1950. So next week is not in our favor. But after that things change.

Not only do we have Yom Kippur but we will also be entering into the fourth quarter in the second year of a 1-Term Presidential cycle and the fourth quarter in the sixth year of a 2-Term Presidential cycle. As you can see below this is a very bullish time frame. While history might not repeat itself it doesn’t pay to fight the odds. If the opposite of the expected outcome occurs, you know we are probably dealing with something more severe in regards to a market pullback.

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We are keeping a very open mind right now at Big Wave Trading in regards to the current tape. As long as leading stocks hold up, new long signals are triggered, and some of our leading current holdings do not trigger full sell signals, we will continue to operate from the long side. However, we will just be extremely more careful here with our model under an operational SELL signal that could change back to NEUTRAL and then BUY and then back to NEUTRAL and SELL again before the week is over. It’s a QE tape in uncharted territory in regards to profit margins, earnings growth, and sentiment. What do you expect? Keep an open mind. Thank you. Aloha.

TOP CURRENT HOLDINGS – PERCENT GAIN SINCE OUR SIGNAL DATE – DATE OF SIGNAL

VIPS long – 456% – 7/17/13
HEES long – 241% – 9/4/12
TPL long – 126% – 10/22/13
WDC long – 122% – 1/9/13
USCR long – 88% – 4/12/13
OVAS long – 54% – 8/8/14
VDSI long – 32% – 8/4/14
HPJ long – 29% – 8/25/14
AGIO long – 26% – 9/24/14