After last week's mostly negative gyrations in the market, I expected to see an overwhelming amount of down-trending results from my weekend computer processing output. I was a bit surprised to see so many positive indicators. There were plenty of negative (bearish) indicators, mind you, but far more indicators showing a bullish trend in the making than I had expected to see.
Certainly, Monday's triple-digit sell-off is enforcing the bearish segments of those analysis results.
I am only about 5% invested at this writing after taking profits over the past three weeks. I still believe this market could move lower but the conflicting results of both bull/bear indicators places too much risk on the table (at this point) to be any more aggressive in my trading.
I like the fact that I am heavily in cash at the moment. Let's see how the week progresses. If I get further confirmation that the market is on a definite down-trend, I'll load up with more inverse ETFs next week. On the other hand, if the bulls get back in control, I don't want to be too heavily exposed to the short side of this market.
The biggest concern I have regarding the direction of the market has more to do with the Fed than anything else. The Fed has, in my opinion, through its policy of price-fixing of interest rates and artificial liquidity in the stock market through its thinly veiled debt monetization scheme (aka, quantitative easing), kept the stock market soaring for the past 3 years in spite of a globally weak economy and horrid employment numbers.
I think Bernanke could see the failure of the Fed's monetary policy with regard to the economy and had to show some restraint in the last few months of his tenure; hence the face-saving "taper" strategy. Yellen has to keep the so-called 'taper' in play to avoid the look of not agreeing with what Bernanke had started, but it would not surprise me to see far less tapering in the future... if the market continues to flounder as it has so far this year.
I don't believe the market is floundering because of an anemic economy. The economy is very anemic and hasn't changed a lot for the last couple of years. The only thing that has changed is the Fed. I suspect the tapering will 'taper' and the market will continue floundering higher on very mediocre economic data. I suspect politics will once again come in to save the day and the Fed will obligingly keep the spigot open for free money. This is an election year and the party in power wants to remain in power and will do everything it can to keep up the appearance that the current policies are working. Obviously you can fool a lot of the people a lot of the time and the politicians are counting on that fact.
When the market is down so much (DJIA -2.08%, S&P 500 -2.28%) in a single day and down so much for the year (DJIA -7.26%, S&P 500 -5.75%), it is comforting to know that we made the right decisions in moving to cash and into inverse ETFs before this debacle in the market started. Granted, the market could suddenly reverse at any time and make big moves higher, but as I said above, a lot is going to depend on the Fed and the Fed is out of the picture until the next Fed meeting in March. The odds seem to favor more downside than upside in the market unless some spectacularly good economic news surfaces.
So, when my computer programs (CycleProphet Tools) tell us that the signals are mixed with a significant number of bull and bear signals in play, one can easily see why either staying on the sidelines or playing the short side of the market makes sense.
Still... I am not ready to jump into nothing but short plays; although after today, I am sorely tempted. I am concerned that the number of inverse ETFs giving technical buy signals dropped so significantly this week. If the number of buy-rated inverse ETFs had jumped higher, I would be looking to put most, if not all of my money into inverse ETFs in a broad range of market segments. But, the computer output is not conclusively indicating this is the beginning of a 2008-type event or anything like it. As such, taking a slow and steady approach with staying mostly in cash plus putting a little money into inverse ETFs is a good working strategy this week.
Remember... I am a long-term investor... one-week-at-a-time. As I always do, I will completely reevaluate the data after this (and each subsequent) coming weekend's computer run.
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