Sunday, August 18, 2019

Another Game Of Chicken?

SGS  Market Timer Status:  SHORT 
SHORT as of the close of Friday Aug 16, 2019
SGS is a Long-Term (weeks to months) Timer
Why Market Timing Is A Must

Since March of 2009, equity markets worldwide have been playing a game of chicken with central banks.  In the US for example, as shown on SPX monthly chart above, every time SPX had corrected more than 15% from its peak, the Fed intervened to shore up US equity markets by announcing a bigger and better round of QE. Last December, when SPX dropped 20%, the Fed announced that they would end their QT. The Fed ended their QT in early August. 

It seems that the Fed will not let SPX drop more than 20%. I'm not exactly sure why but my guess is that the Fed is worried about a sudden popping of the corporate debt bubble which is at its all time highs according to the chart above.  

A sizable correction in the stock of a company with a large outstanding debt will eventually push the company into bankruptcy.  It is a vicious cycle, as the stock of a company with a sizable outstanding debt sells-off, the chance of its bankruptcy increases which pushes its stock even lower, e. g. GE.

There is a good chance that the sell-off that started on August 1 continues.  Once the correction reaches around 15%, the Fed very likely cuts rates by 50 basis points.  I doubt if rate cuts would stop the selling.  If it continues to around the 25% correction level, the Fed very likely would announce a sizable QE plan.

SGS declined last week confirming the sell-off.  On Friday SGS changed its status from NEUTRAL to SHORT.

Support and resistance levels for SPX for this week are shown above. 

My Plan

Anticipating SGS going SHORT, I opened my first two of three long positions in SDS last week.  My plan is to open my final position in SDS once the recent lows in indices are breached.

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.