Last month–on Monday, October 5th, after a brutal August and September in the stock market–I wrote a blog, entitled, “Are we at the bottom of this correction?” There, I gave five technical reasons that we have likely seen the lows for the year and hopefully should see a sizeable Santa Claus rally in Q4.
By month’s end, the market put up its best gains in 4 years with the Dow rising a whopping 1,379 points and the S&P 500 gaining 8.3% (http://www.marketwatch.com/story/us-stocks-eye-small-gains-ahead-of-data-as-best-month-in-4-years-winds-down-2015-10-30).
In this edition of “Technically Speaking” I want to answer another question than may have a big bearing on your portfolio, namely is that Santa Claus rally mentioned earlier still on the table? Or are the bears, contrarians, and fear mongers right—that the Grinch will steal Christmas?
First, I’d like to address the bearish concern using weekly charts of the S&P 500, containing three exponential moving averages—the 10, 50, and 600–and a hybrid indicator called StochasticsRSI.
The trading strategy works as follows: buy when the red 10 Exponential Moving Average (EMA) crosses above the green 50 EMA and to sell when the 10 crosses below the 50 EMA. And to avoid what traders call “whipsaws”—the costly, repeated buying and selling of one’s position–one should only sell when the StochasticRSI is oversold as indicated by the circled ellipse. (Please be aware, however, that NO strategy assures a profit or protects against a loss.)
Using this criteria, we should be selling right now, shouldn’t we?
Maybe a few weeks ago, but not anymore I would argue.
Using the same criteria, here is what the same averages looks like today, where the blue line is the 10 EMA and red, the 50 EMA.
If anything thus far, I believe we’re witnessing similar market action displayed in 2011, the last best buying opportunity had in years.
Using the same criteria on the other major indices further supports this view.
The ETF that tracks the Nasdaq Composite Index referred to as the QQQ or “Qs,” for instance, is so strong that it’s 10 never crossed below its 50 Exponential Moving Average in the first place.
The only major index that hasn’t displayed this bullish behavior yet is the Russell 2000. Here you can see that its 10 not only crossed below its 50 XMA, but it has yet to cross above it.
So what are we to make of that?
Indeed, that is the question that has the pundits in Barron’s and the WSJ and on the networks—especially CNBC and Fox News—talking.
As a former equity index futures trader, here’s my take.
Think of the Russell 2000 as the tip of a dog’s tail, the Nasdaq as the middle of the dog’s tail, and the S&P as the base of the dog’s tail, if not the dog itself.
Then ask yourself this question: Does the dog wag the tail or the tail, the dog?
It’s no different than defending your man in the game of basketball. Any defensive coach worth his salt will tell you: keep your eyes on your man’s midsection—his belly button—not his head and limbs, for if you go for every head and ball fake, you’ll get beat time and again.
Well, it’s the S&P and the Nasdaq that matter most, not the volatile Small Caps. As a trend follower, I watch the former and trade in their direction.
If still unsure, just look at the VIX, a measure of options volatility.
A low reading below 20-25 is bullish, and a high reading of 25-30 or higher is bearish.
As of today, 11/2/15, it’s only 15. That’s lower than at the beginning of October, not higher. Even the staunchest bear will be hard pressed to find a time in market history that the VIX fell as the markets crashed.
Low is good and so are the averages and current price action, and that’s why I hold that we are heading higher from here.
In the end, however, only time will tell.
Be sure to tune in next month for another edition of “Technically Speaking” to find out how the Russell 2000 and VIX play out in November.
Until then, have a safe and Happy Thanksgiving, everyone!