Sunday, January 13, 2019

The 20% Crack

SGS  Market Timer Status:  SHORT 
SHORT as of the close of Friday Oct 5, 2018
SGS is a Long-Term (weeks to months) Timer
Why Market Timing Is A Must

In the last 20 years or so there have been a number of financial debacles that have resulted in a sudden and quick collapse of banks or hedge funds.  The collapse of MF Global in 2011, Long-Term Capital in 1998, or Barings Bank in 1995 are prime examples of those financial debacles.

One thing those sudden and quick financial meltdowns had in common was that, once losses in positions they held exceeded a certain level, the demise of the hedge fund or the bank became inevitable.  It was similar to a crack in a dam wall.  Once the crack grows to  a certain size, fluid dynamics laws governing the water pressure and the water flow around the crack, dedicate the collapse of the entire wall.

Since SPX bottomed at 666 in March 2009, as shown on the chart above,  every time SPX corrected 15% or higher from its recent high, the Fed or other central banks intervened indirectly to shore up major indices. Two Fridays ago on January 4, 2019, once SPX had corrected 20% from its recent all-time high, Powell, Yellen, and Bernanke assured financial markets that the Fed would not hesitate to intervene again should it become necessary.  In other words,  the Fed PUT is still in.  U.S. major indices rallied around 4% that day, they have continued their rally and as of the close of last Friday, major indices are up around 10% from their recent lows on December 26, 2018.

It seems that, post 2008-2009 Sub-Prime Crash, once the size of the crack in the Wall Street, grows to around 20%, the Fed rushes in to fill the crack at all costs.  Maybe the Fed knows something we don't, i.e. once the crack grows beyond 20%, the entire Wall Street collapses. Maybe, that's why the Fed has not and will not let any correction get larger than 20%. Maybe the Fed would be powerless in stopping the next significant correction similar to how major financial houses in 1929 could not stop the biggest stock market crash in history.

After bottoming at -1741 on December 26, SGS advanced sharply in the last six trading days.  The sharp reversal of SGS signals that there is a better than 90% chance that the lows printed on December 26 for major indices was the bottom for the recent sell-off.

Support and resistance levels for SPX for the upcoming week are shown above.   Going forward, I see three scenarios for SPX:
  • (A) Most Likely (70%) - SPX and other major indices fail to close above their 50 D-SMA's, sell-off and successfully test their recent lows (SPX 2346) with super bullish divergences in SGS, volume and indicators. Major indices then start a new bull leg to challenge their all-time highs.
  • (B) Unlikely (20%) - SPX and other major indices continue their rally, close above their 50 D-SMA's and continue higher to challenge their all-time highs.
  • (C) Very Unlikely (10%) - SPX and other major indices fail to close above their 50 D-SMA's , they sell-off, take out their recent lows (SPX 2346), and go lower to test lower support levels.

My Plan

I'm still in cash and watching the action from the sideline. I need to see at least three of five major indices (DJI, DJT, NAZ, RUT, and SPX) solidly (0.5% or higher) trade and close above their 50 D-SMA's before opening long positions.

Current Long-Term Portfolio (2019)
Past Long-Term Portfolios (2018-2008)


SPX: S&P 500 Index    SMA: Simple Moving Average
DJI: Dow Jones Industrial Index    EMA: Exponential Moving Average
DJT: Dow Jones Transportation Index    PDL: Primary Downtrend Line
NAZ: NASDAQ Composite Index    PUL: Primary Uptrend Line
RUT: Russell 2000 Index    ASL: Active Support Line
OEX: S&P 100 Index    ARL: Active Resistance Line
NDX: NASDAQ 100 Index    DTL: Dynamic Trend Line   
TUL: Tentative Uptrend Line   TDL: Tentative Downtrend Line
TLR: Trend Line Resistance   TLS: Trend Line Support

Disclaimer: The views expressed are provided for informational purposes only and should not be construed in any way as investment advice or recommendation.  Furthermore, the opinions expressed may change without notice.