Stick to Short-Term Trades, Options, and Commodities … or You Might be Sorry
If you think recent meager attempts by stocks to claw their way back to black have any bearing on the long-term trend of the market, I’m about to burst your bubble.
Or if you place just as much weight as we do on the “granddaddy” of all indicators, the NYSE Bullish Percentage Index, and perceive it flipping from O’s to X’s on May 27 as a trend-changing event, I’m also about to burst your bubble.
(Click on any image to enlarge.)
Finally, if you look below at the U.S. Industry Bell Curve (found on TMI’s Sector Prophets Pro platform) and you begin drooling at the sight of 42 sectors in blue boxes (with Demand in control) and the number of investment opportunities it suggests, well, you get my point.
If you’ve been reading daily TMI articles, it should be clear to you by now that we’re in a bear market. All the editors here have tried to hammer that reality home since early in the cycle.
On the free BPI Update page, Bill Spencer explained that you should expect to see short-term rallies as the market makes new legs lower and how this back-and-forth action is typical of the current Declining stage of the market.
While the market should now be considered strong over the short term, it remains weak over the intermediate- to longer-term. The long-term trend— which is bearish, no question about it—is what needs to be at the forefront of your mind, not the most recent reversal.
We definitely see Demand returning to a number of sectors (as illustrated by the above U.S. Industry Bell Curve). That, however, is a short-term breadth indicator. We’ve seen blue turn to red and red turn to blue in the blink of an eye so there’s no telling when the proverbial switch will flip again.
Consult Short-Term Charts for Short-Term Opportunities
Is it possible to make a short-term bullish trade (or hedge on the bear market correction), that checks all of the technical strength boxes and still walk away with a profit?
Sure, but you should focus on specific technical indicators for spotting trades that can be turned around in days or weeks.
(By the way, all of the tools I mention in this article can be found on TMI’s Sector Prophets Pro data platform).
For clarification, long-term equals months to years. Intermediate-term equals weeks to months, and short-term equals days to weeks.
Like I said earlier, we should focus on the shorter end of the trade spectrum if we want to play short-term rallies.
When used properly, the right indicators can make the difference between big losses and huge gains.
I already flashed the NYSE BPI. This is a long-term indicator that gauges risk. It’s telling us that bullish risk is high for the long-term but lower over the short-term.
Perhaps when it flipped to O’s on April 28, you did all the right things to minimize losses. You sold lagging positions (stocks that have been underperforming), tightened your stop loss orders on long stock positions, bought protective Put options, or switched to buying stocks with low “betas” or low volatility.
Now you’ve got cash to put to work. You already know that 42 sectors have Demand in control and just three sectors have Supply in control.
But which sectors are best suited for short-term trades in this market climate?
To find the answer, you’ll want to consult the %10-Week Moving Average (or 50-day) breadth indicator. This shows the percentage of stocks within a given universe that are trading above their 10-week (or 50-day) moving average.
Sectors are strong over the short-term when their %10-Week Moving Average is in a column of X's. With so much volatility in today’s market, we’re seeing big daily moves on the upside and downside so it’s best to consult other indicators as well.
As the most sensitive of the breadth indicators, stocks and sectors will move above or below the 50-day timeframe early and ahead of the 30-week MAs.
So, it’s a good idea to also look to the %30-Week Moving Average, which shows the percentage of stocks within a given universe that are trading above their 30-week (or 150-day) moving average.
Gaming, below, is an example of a sector in a rising column of X’s and on a Buy signal on its 10-week MA chart. It is also in a washed-out level with the number of stocks within Gaming trading above that level at less than 20%.
When you look at Gaming on its %30 MA chart, we see that while it’s on a Sell signal, it is in a rising column of X’s. The sector is even more washed out here with less than 10% of stocks trading above this “longer” short-term indicator.
The sector reversed from a column of O’s to X’s on June 2, showing an early sign of demand returning and a potentially short-term bullish opportunity setting up.
At this point, institutions have covered their short positions (stock which had been sold short has been bought back), so those institutions that previously were betting on the market’s decline are no longer willing to establish new, short positions (for the most part), thus eliminating a lot of the selling pressure.
Here are the %10 MA and %30 MA charts for the Savings and Loans sector. The sector is in a column of O’s and on Sell Signals on both charts.
And while the S&L sector is in washed-out levels on both charts, traders continue to sell shares in Savings & Loans stocks.
Stocks within Gaming provide potentially good short-term trade opportunities. Savings and Loans stocks don’t.
Other than possible short-term trades, and/or investments in Commodities-related stocks, you can always use any number of options’ strategies to continue to profit while managing bear market risks.
If you stray outside those possibilities, well, your bubble might burst yet again. But don’t be too hard on yourself.
It’s really hard to drown out all the noise (and different opinions) coming at you from every different direction.
The key is not to care what anyone thinks or believes. Instead, you must focus on the X’s and O’s, what the numbers and technical indicators tell you, and let them guide you through the market ups and downs.
Hope you have a great weekend!