Sunday, August 16, 2015

The Bull, The Bear And The Ugly

SGS Market Timer Status:  SHORT 
SHORT as of close of 7/24/2015

RTS Current Portfolio (2015)
The Bull (10% Probability):

On Wednesday last week, SPX penetrated its 200 D-SMA by over 1%, but still managed to close safely above it.  Although, that type of intraday reversal is bullish, but at the same time that deep of a penetration of an important support signals a high likelihood of retest of that support within a few trading days.  For bulls, SPX needs to continue trading above its 200 D-SMA or at least above its PUL's for the next couple of months, then continuing going higher on the back of good economic data, earnings and forecast.

The Bear (70% Probability):

The likelihood a Fed rate hike in September is high.  If the US economy starts to grow at a 3% or higher rate, the Fed would continue to raise rates.  That means the era of "free money" is over for all, including Big Money, hedge funds, companies and the consumer.   The game that went on for over six years, namely central banks' agents using debt papers they bought on behalf of central banks (the Fed, ECB and BOJ) as margin to buy equities, is over.  It would also mean the end of massive stock buy back programs by companies, Apple for example.

Rising interest rates is a game changer and there are consequences including a bull market correction, probably around 15% to 20% by late this year.  Should the US economy achieve and sustain a 3% to 4% growth for a few quarters, as the Fed hopes, then chances are good that indices to resume their uptrend and reach new high's in 2016.

The Ugly (20% Probability):

What if, despite all of that QE, the US economy grows at an anemic rate, or worse yet it actually shrinks (negative GDP)?  Then things would get pretty ugly and chances would be good that SPX sells off to its historical rate of return, around 6%.

I'm still waiting to do my third and fourth short sells.  Chances are good that SPX tests quadruple  resistance (ADL, DTL, 50 and 100 D-SMA's) around 2095 on Monday or Tuesday.   My plan is to do my 3rd short sell as SPX tests that resistance zone.  After the test, should SPX sells off and closes below its TUL (thick pink), I would do my fourth and final short sell.

SPX: S&P 500 Index    D-SMA: Daily - Simple Moving Average
DJI: Dow Jones Industrial Index    D-EMA: Daily - Exponential Moving Average
DJT: Dow Jones Transportation Index    PDL: Primary Downtrend Line
NAZ: NASDAQ Composite Index    PUL: Primary Uptrend Line
RUT: Russell 2000 Index    ADL: Active Downtrend Line
OEX: S&P 100 Index    AUL: Active Uptrend Line
NDX: Nasdaq 100 Index    DTL: Dynamic Trend Line   
TUL: Tentative Uptrend Line   TDL: Tentative Downtrend Line