08/19/2011
Long-Term SELL Signals
On 8/2/2011 our mechanical Thrust/Trend Model generated a medium-term NEUTRAL signal for the S&P 500 Index just in time to avoid the market break on 8/4. (Neutral means to be market neutral -- in cash or fully hedged.) After the breakdown we believed we had entered a bear market, but we had to wait for the long-term component of the Trend Model to generate a mechanical SELL signal to make it "official", which it did as of 8/17/2011.
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(This is an excerpt from August 19, 2011 issue of the blog for Decision Point subscribers.)
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A long-term sell signal is generated when the 50-EMA of a price index crosses down through the 200-EMA (generally known as the Death Cross). At Decision Point we don't consider the long-term sell signal to be a demand for action. Rather it is a flag that says, "Hey, folks, we're in a bear market now. Act accordingly."
Below is a daily bar chart of the S&P 500 with the recent crossover circled on the right. Just to show that it is not a perfect indicator, I have also annotated on the left two 50/200-EMA crossovers that occured in August and September of last year, both of which were bad signals.
Am I concerned that this latest signal will be wrong? Not really. Its value is primarily in that it tells us to adjust our expectations from bullish to bearish. In a bull market it is best to stay positive and expect bullish outcomes, even during corrections. In a bear market, if we expect negative resolutions, we will be right most of the time.
It is a long-term sell signal, but it doesn't mean to go 100% short on the day of the signal, rather we should look for short- and medium-term opportunities to go short to develop. This is where we have a margin of safety when working with these long-term signals -- we look for opportunities. If we don't find many, our exposure will be limited.
Reviewing major market indexes I see that we have long-term sell signals on The S&P 500, S&P 100, NYSE Composite, Russell 2000, Wilshire 5000, S&P 400, and S&P 600. We are still waiting for the Dow, Nasdaq, and Nasdaq 100 indexes, but their prices are well below their 50-EMA and 200-EMA, which means sell signals are virtually inevitable.
A recent CNBC article urges: "Don't Fear the 'Death Cross' in This Fast-Moving Market". In other words, keep right on thinking like a bull. That's just silly. We have objective evidence that the market has entered a bear phase, so we should take that evidence at face value until the evidence changes. The fact that we ahd two bad signals in 2010 is no reason to ignore the current signal because the model has a pretty good record over time. In 2010 Timer Digest ranked Decision Point #4 for Long-Term timing over a 10-year period, with a gain of +77.64% versus a loss of -4.74 for the S&P 500. (Past performance does not guarantee future results.)
Bottom Line: Long-term SELL signals abound on the major stock indexes, which means we are by our definition in a bear market. It is now time to pass our analysis through a bearish screen, to assume that most surprises will be to the downside, and to look for opportunities to sell short. This is a perfect example of technical analysis being a wind sock, and we have no choice but to plan our approach accordingly. If the wind changes, we will adjust.
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COMMENTS FROM SUBSCRIBERS
I joined you at decisionpoint in fall 2008 if I remember correctly. The lessons you have provided since then provide a technical foundation for being smart and saved the day this summer and allow my knowledge of business/economics to combine the fundamentals with the ultimate truth (price action)....THANKS!
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I read the last post by Carl.
Sometimes it's okay to post the obvious and not be so guardedly humble.
Your neutral signal before the break saved your readers tremendous capital if they paid attention. Point it out. Erin (in a recent reply to my email) had it spot on when she described neutral as get out. I'm am sure many of your readers still wait for a sell to do so, not realizing that sell means it's time to short into rallies.
Your service served me well when it went thru a neutral call then back to buy then back to neutral. I played it well and only got whipsawed a tad. It saved my ass compared to where most others didn't. If I was smarter, I would have gone long bonds.
I think the odds are stacked more towards a rally this week taking a stab at the 50- or 200-day MA. I also think happy words from Merkel will likely provide the spark. In the end though, it's a head fake as I think you too see another bear market channel in the making.
Same pattern:
Dot com bust channel.
Housing bust channel.
Bailout bust channel.
Great neutral (get out) call.
Be proud of that call Carl.
Erin has elevated my game by her near daily (instructive) posts.
I get it now.
You guys are offering a service that continues to impress.
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Technical analysis is a windsock, not a crystal ball.
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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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Copyright 2011 Decision Point. Nothing herein should be construed as an offer or solicitation to buy or sell any security. Past performance does not indicate future results.
