Our Sentiment Table flashed oversold indicators on Sunday, and the SPDR Dow Jones Industrial Average ETF DIA,+1.77% has rallied 2.9% since, with the ProShares Ultra Dow30 DDM, +3.47% has rallied twice as much. But now investors should exercise caution.
Please keep in mind that our Sentiment Table is typically most accurate at identifying near-term shifts like this, but I do not use it as a longer-term indicator. In other words, it is very useful at identifying a snapback before it happens, like we saw today, or a sudden shift lower if the signal was an overbought condition instead, for example.
Now that the snapback has taken place, that oversold condition has been mitigated. That turns our attention to the driving indicators that we have been talking about, mainly the longer-term charts, the risks that the bond market is telling us about, and our macroeconomic work.
The name of the game here is to take advantage of opportunities, and it is not to be one sided at all, so although many of you may have a look at the macroeconomic work, the longer-term charts, and the warnings that are coming from investors in the smartest asset class I know of, and think that we may be one sided, that is certainly not the case. Our objective is to remain in control of our risk and to take advantage of the market’s move, regardless of where the market goes. If it so happens that the move is higher, that’s great, and if the move is down, that’s great, too.
Our additional analysis on Sunday told us that we were very close to a level of longer-term support, which suggests that we are very close to a trigger in our Strategic Plan strategy, too, but it would require the markets to decline about double of what they increased for that to happen. Right now, that seems like a stretch, but a test of longer-term support does not need to happen this week. It just so happens that our combined analysis over the weekend told us that the probabilities were high.
If you’re reading this and slightly confused, let me shed additional light on the subject. Our Sentiment Table was telling us that an oversold condition existed and we should be prepared for a snapback in the market accordingly, but that is a near-term observation and our more broad observations suggest that a deterioration to longer-term support take place, so intuitively we would expect a decline to longer-term support after such a snap back. We shall see…
Disclaimer: Stock Traders Daily provides trading strategies, which by definition incorporate risk controls, and it has only engaged in buy and hold strategies twice since the turn of the century. The first was in October of 2002, and those buy and hold strategies lasted until 2006, and the second was in February of 2009, and those buy and hold strategies lasted until the end of 2010. Every point in between Stock Traders Daily has been providing risk controlled strategies, market based strategies, and strategies for approximately 3000 individual stocks, which are unbiased and which incorporate the notion that short term gains lead to long term success. There is a time and a place for buy and hold strategies and this is neither the time nor the place for that approach in our opinion. Risk controls are essential.