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Buying or Shorting Opportunity… or Both?

Earlier in the day, last Friday (before the big meltdown) we put 10% of our money into a 2x short ETF and also put about 10% (in my managed accounts) into long silver positions. Earlier in the

Earlier in the day, last Friday (before the big meltdown) we put 10% of our money into a 2x short ETF and also put about 10% (in my managed accounts) into long silver positions. Earlier in the week (Tuesday), we went completely to cash and serenely sat on the sidelines as the market gyrated lower and lower as the week progressed. So far, it looks like we made the right decisions at the right time.

With the S&P downgrade of the US late Friday, the market is likely to open some lower tomorrow (maybe a LOT lower), but I am not nearly as concerned about tomorrow as I am the next few weeks. We are perfectly situated in this current market climate and I am not interested in adding a lot of risk to the portfolios right now. Cash-is-King…

Take a look at the time-cycle forecast chart of the S&P 500.

As you can see, the time-cycle analysis (which does NOT take current downgrades or political ineptness into account, except in the form of inversion forecasts) is indicating that the market will bottom within a week or so. The Inversion forecast (red dotted line) indicates the market will move lower into mid-August, followed by a somewhat tepid recovery back to the 1270 level.

So… is this a buying opportunity or a shorting opportunity. I think it may be both, so here is how I plan to trade this market… at least this is tonight’s plan… with more clarity in how global economies react in the coming days, I always reserve the right to modify my trading strategies. We strive to stay nimble and adjust with the vagaries encountered in the daily (hourly) ebb and flow of markets, economies and political machinations.

There are some very interesting shorting opportunities for some SuperCycles shaping up for this week. After the bounce higher (purple dotted line) into mid-week, we may be putting on a SuperCycle short trade or two. We may cover our existing short position in the morning if there is enough of a down-tick in the market. Asian markets are supporting a sell-off in the morning and the US futures are weak… not terribly weak, but weak enough to provide an opportunity to take the short-side profit off the table. I will have more to say about this in my commentary tomorrow morning.

There are a couple of stocks that I have had my eye on for quite some time that are now selling at much cheaper prices. I will be looking to pick up one or two of these if the SuperCycles support the trades.

A View From Elfdom…

The Bull-to-Bear ratio is seriously Bearish with a Bull-to-Bear ratio of more than 23-to-1 in favor of the Bears. That is one of the most lopsided weekly ratios I have seen. This results in a Bull-to-Bear Rating of [ – 4 ], just one notch above the most Bearish rating possible.

Investor Sentiment Forecast
For the Upcoming Week
Investor Sentiment Weekly Forecast

The Turner Investor Sentiment Forecast provides a one-week directional forecast on the market, with [-5] being the most Bearish and a [+5] being the most Bullish. This is predicated on the ratio of number of new Buy Signals to the number of new Short Sell Signals for the previous week. The assumption is investors are becoming more Bullish the more lopsided the ratio becomes in favor of new Buy Signals; and, the converse is true; the more lopsided the ratio becomes in favor of new Short Sell Signals, the more Bearish investor sentiment.

Turner CrossOver Oscillator

The Turner CrossOver Oscillator provides an indication of the over-bought or over-sold condition of the market. The red line (New Short Sell Index) shows a technical direction and strength (or lack thereof) of investors to push stock prices lower, triggering new Short Sell Signals. The higher the Short Sell Signals line, the more Bearish the market. The black line (Composite Index) is the combined impact of both the new Short Sell Signals and the new Buy Signals and is an indication of the degree of oversold or overbought condition of the market. Buying opportunities exist when the Composite Index is moving higher. The higher this line moves, the more Bullish the market. Market bottoms are represented by a change in direction of the Composite Index from moving lower to moving higher. Market corrections become much more likely the Composite Index crosses the Short Sell Index from above the Short Sell Index to below the Short Sell Index. The market is represented by the green shaded area.

The Turner CrossOver Oscillator Composite of Signals (black) line has moved into a down-trend, signaling increasing downward pressure on equities. The Short Sell (red) line is trending much higher, indicating the market is dumping stocks; even higher quality stocks in a flight to cash. The market is now significantly oversold but this is a condition that can continue for some time.

When everyone is selling, it might be the right time to buy. As mentioned above, I have some very high-quality stocks that have suddenly ‘gone-on-sale’ and are very tempting targets. When the time-cycle forecasts and the SuperCycles line up, I will be seriously considering adding these top-drawer (fundamentally) stocks to one or more of my portfolios. I suggest that you take some hard looks at the slightly beaten-up blue-chip stocks. You may find one or two that will fit nicely in your portfolio. However… there is no guarantee that the market will not move lower and maybe a LOT lower, so don’t rush out and start buying. I am not. I may pick up a high-quality stock or two and I may short the market some more. This is unchartered waters and as such, I do not want to ignore the potentially significant impact of the fear in the market, the potential of a double-dip recession and/or an additional downgrade of the US in the near future.

We are 80% cash and liking our position. I am not ready to put a lot of money to work right now, but I am looking to nibble around the edges and maybe pick up a bargain or two in the process.

Are Your Seatbelts Fastened…?

In the week ahead… and especially the next two to three weeks… we could see a LOT of volatility in the market. Weaker hands will be rushing to the sidelines. High risk-takers will be plunging back into the market to pick up so-called bargains to attempt to recover from last week’s losses. Margin calls will push some to liquidate holdings. Even the short-sellers may do some profit-taking and push the market into a minor rally. There could be more than a few blood-baths in the process.

My advice is to stay small and wait for the smoke to clear before jumping back into the market… long or short. If you have been following my missives and/or following my CycleProphet Trades, you should be very pleased with where you are right now. While most are scrambling to move to safety, you are have 80% to 90% of your money in cash, waiting for the next buying opportunity. This is a good place to be right now.

Have a great week in the market!

Your anxious-to-see-how-the-market-moves-in-the-morning portfolio manager,

Mike Turner, President CycleProphet, Inc.

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