The Big Wave Trading model remains on an overall SELL signal across the board. That being said, we have become oversold on our short term daily oscillators and we expect this bounce to continue. Therefore, our model is ready to switch back to a NEUTRAL operational condition if the major market indexes can retake their intraday highs of 9/30 on the Russell 2000 and 10/1 on the other indexes. This is an extremely fluid situation due to an abnormally high amount of crosswinds that we will go over below.
While there are times in the market where you have more positives in your favor than negatives, in today’s tape with the world banks interfering in normal business cycles you can never be sure an uptrend will work. So before we look at what can derail this seasonally potentially very bullish quarter, let’s look at what is in our favor.
We are starting to get very oversold on my short-term daily oscillators in all the major market indexes. Now, while we are still nowhere oversold on weekly oscillators we do have one index hitting oversold levels on the weekly time frame. The Russell 2000. So we are getting there. We also have seen the put/call ratio above 1 for a few sessions now. This is normally where we see market reversals, from these levels. The NAAIM exposure index is down to the 41 level where we have seen the market turn higher over the past 3-4 years. And this puts us right in the sweet spot seasonally in a 4-year and 8-year Presidential cycle. The fourth quarter of the second year in a 4-yr and the fourth quarter of the sixth year in an 8-yr cycle are two very bullish times seasonally for stocks. This is a lot of positives.
On the other hand, this is the last month that POMO in the form of current QE is happening. At the end of October there will be no more QE and it will be all up to the market to do the heavy lifting on its own. Following this, interest rates will begin to rise at some point next year. The US Dollar is hinting to that already. While this is the biggest negative it is really the only one overall that is seriously weighing against this market. That being said, it is not normally until the 3rd rate hike that markets get really sick.
On a very-short term basis the two biggest issues I have from turning bullish at this point, following Friday’s gap and run day, are the non-oversold conditions on weekly time frame of the major market indexes and the severe damage some leading stocks took during this most recent sell off. While some leaders held up like TWTR, too many got hit thinning out the herd of “good looking” leading stocks by even more. In a healthy uptrend you have a lot of high quality stocks with high quality patterns setting up and moving higher. When the herd gets thin you enter a more risk prone market environment. With the recent severity in moves up and down on the indexes, it appears we are in that kind of market environment on the short term.
However, I know my history, and last time the market pulled back like this I said the same thing. Instead it V-ramped higher not allowing for much backing and filling. However, this time around, I think we need it. That is until we can get these oscillators to oversold conditions on the weekly time frame. By that point in time some of these leading stocks that have seen some volatile trading can straighten up and work themselves higher. If they ramp higher in a V-shaped fashion, then we are going to be left underinvested. We doubt this will be the case for long, if the rally gets going, as we will get our “add” signals in our highest quality names but it will be, once again, disappointing to watch the market operate like this. We still reminisce on the “good ol days” of pre-QE when we could be certain 75% of the time with complete competence on our market direction analysis. Not the reality of the situation anymore.
Going into Monday we remain with an extremely high level of cash, 25% of our account is in long positions, and 10% is hedged in short positions. If the market continues higher, and we get our signals in our highest quality candidates, we will be able to get heavily long very quickly. As it is, for now, it is just day two of a rally attempt. Nothing more, nothing less. There is a lot of technical damage on the short-term and that must be respected before we plunge back on the long side. Cash is still king, at this current moment. By the end of the week, it might be a whole different story. Thank you for reading. Have a great upcoming week. Aloha.
Top Current Holdings – Percent Gain since Signal Date – Signal Date
VIPS long – 446% – 7/17/13
HEES long – 223% – 9/4/12
WDC long – 117% – 1/9/13
TPL long – 115% – 10/22/13
USCR long – 83% – 4/12/13
OVAS long – 62% – 8/8/14
VDSI long – 42% – 8/4/14
HPJ long – 30% – 8/25/14
AGIO long – 26% – 9/24/14
