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George Simone
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I'm a long-time Market Participant who has criss-crossed the Market for more years than I care to remember, and a few years ago I got hooked on studying and trading ETFs, especially the leveraged kind. Charts, good charts are an absolute necessity in this field, so the Linchpin of my ETF... More
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  • On Razor's Edge 0 comments
    Feb 3, 2014 2:02 AM

    As measured by the DOW, Wall Street had its worst January since 2009, when the market was still in a freefall which was triggered by the financial crisis. The selling squalls continued last Friday, January 31, as it is beginning to sink in that the Fed is going to stick with its taper plans.

    Even though that comes as no surprise, there were expectations in the market that because of the emerging markets turmoil the Fed would delay tapering its QE programs. That it did not rattled investors' nerves, and the selloff was on. The market hasn't experienced this kind of volatility for a while, just smooth sailings to the upside. This obviously is changing, and investors have to adjust and get used to it.

    So Wall Street took a close haircut at the end of January, just as it did when this month started. Besides being top-heavy and ready to shed some of the gains, there are plenty of adverse fundamental reasons for market strategists to chew on. Worries about European deflation, currency troubles in the emerging economies, slowdown in U.S. jobs growth, Chinese manufacturing hitting the skids and the Fed deciding to taper its easy money spigot and let the economy as well as the markets fend for themselves.

    On top of that, a good majority of equity advisories were exceedingly bullish at the start of January, a sure sign that the market was about to tank. "It's about time," say some savvy market strategists who had their clients take handsome profits as early as last December, when it became clear that the market was soaring on nothing more but the fumes of an empty gas tank.

    So now, these investors are sitting by the sidelines on a pile of cash wondering if this current selloff is just a minor hiccup, or the beginning of a 2007 repeat. As the charts have it, this is still a secular bull market, interrupted occasionally by sharp but short-lived corrections.

    Check this SPX 500 long-term chart and note that everything about this index looks bullish. Its Moving Average configuration [green line beneath the red line] remains positive and geared to the upside and its MACD momentum bars are solid in bullish territory.

    But something ominous is overhanging this index. Not only did the large caps soar too high too fast and are now poised to be cut at the top, but note that the RSI strength indicator of this long term S&P 500 index is blowing bubbles, just as it did at the peak of 2007, shortly before the crisis hit. This begs the question, is this piece of history about to repeat itself?

    (click to enlarge)

    But check this X vs. X chart and note that contrary to the extremely bearish peak of 2008 and 2009 this index appears to be anchored on a very bullish bottom. Keep in mind that the more bearish this index, the more bullish the market. So note that the MA lines configuration remains strongly bearish [green line above the red] as it has been ever since early 2011, and the rest is history.

    (click to enlarge)

    But now the market is at a razor's edge, ready to slide to the bubbles at the top, or the anchor at the bottom. This is why savvy market strategists figure this to be a good time to stay in cash and just watch the market unfold.

    Now to the Troika where the two bull components [SPX] and [SPXL] pulled in their horns and rushed down-hill for cover. The MACD momentum bars for both indexes dropped deep into their respective bearish territories, and so did their RSI strength indicators.

    But for now, the MA lines configurations of these two indexes are still bullish [green lines above the red] which gives a glimmer of hope that the bull may yet survive. But it won't take much for the red line to slip below the green and should that happen, the stampede to the downside will be on.

    Note that the index of the Troika's bear component [SPXS] popped out of the hole it was in since last December, and may be in a position to rally further. Its MACD momentum bars are solid in bullish territory, and so is its RSI strength indicator.

    The only thing still holding this bear back is its negative MA lines configuration [green line above the red.] But the gap is narrowing and once the green slips below the red, the bear is ready to maul the market.

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    The [50%] index reflects the internal health of the market, but there is nothing healthy showing up on this chart. This index took a steep nosedive accompanied by a strongly bearish MA lines configuration [green line above the red.] Its MACD momentum bars are deep in bearish territory and ditto for the RSI strength indicator.

    With charts like that it is no wonder that the market's volatility is rapidly increasing, with a bias to the downside.

    (click to enlarge)

    In spite of all that fundamental and technical negativity out there, this market forecasting junk-bond- canary [JNK] just keeps on chirping a bullish tune. This index was able to deflate the recent RSI strength bubble and is now in a consolidation mode. Its MA lines configuration remains strongly bullish [green line below the red] and that is putting some muscle on the market.

    Still, for as long as its MACD momentum bars keep fading away or heading south, this junk bond will have a tough time climbing to higher highs, and so will the market.

    (click to enlarge)

    This commodity market [DBC] is still a basket case, and this is not about to change for as long as its MA lines configuration remains so exceedingly bearish [green line above the red.]

    (click to enlarge)

    The technology heavy NASDAQ index [ONEQ] also caught a whiff of the general downdraft in the market. Although its MA lines configuration remains bullish with the green line below the red, the MACD momentum bars have given up the ghost, and that will keep on dragging this market down.

    (click to enlarge)

    For the bull market to have any legs it needs a strong Consumer Discretionary sector [XLY] and the bull is just not getting it. Not only is this index in a free-fall, but its MACD momentum bars are rapidly heading south too. With its MA lines configuration also turning bearish as the green line is about to slide above the red, there is little hope that the market can gain any support from the discretionary any time soon.

    (click to enlarge)

    The insider sentiment index [KNOW] is still sporting a healthy MA lines configuration [green below the red.] But with the MACD momentum bars deeply south of the demarcation line, the insiders in this game are turning increasingly bearish, and so is the market.

    (click to enlarge)

    Gold appears to be finally finding some traction. While this index [GOLD] is consolidating, its MA lines configuration [green line below the red] shows signs of turning bullish for the first time since last October. If only its MACD momentum bars could stay in their bullish territory, the yellow metal could actually kick into a rally mode.

    (click to enlarge)

    Supported by its bullish MACD momentum bars, oil [WTIC] had itself a nice little rally last month. But with its MA lines configuration turning bearish again [green line above the red] this rally has stalled with this index poised to head back south.

    (click to enlarge)

    This market is on edge without an intermediate trend in either direction, just volatile swings that are bouncing off each other. This is a time to stay in cash and wait for some direction by the market.

    In case an intermediate trend comes your way, here are some favored ETFs to consider.

    Leveraged Bull ETFs:

    Russell 2000 3x (NYSEARCA:URTY), Health Care 3x (NYSEARCA:CURE), Small Caps 3x (NYSEARCA:TNA), Biotech 2x (NASDAQ:BIB),

    NASDAQ 100, 3x (NASDAQ:TQQQ), Semis 3x (NYSEARCA:SOXL), Financials 3x (NYSEARCA:FAS), S&P 500, 3x (NYSEARCA:SPXL),

    Mid Caps 400, 3x (NYSEARCA:UMDD), Mid Caps 3x (NYSEARCA:MIDU), Nat Gas 2x (NYSEARCA:GASL), Developed Markets 3x (NYSEARCA:DZK), Russell 2000, 2x (NYSEARCA:UWM), Technology 3x (NYSEARCA:TECL), NASDAQ 2x (NYSEARCA:QLD), Financials 2x (NYSEARCA:UYG), S&P 500, 2x (NYSEARCA:SSO), Materials 2x (NYSEARCA:UYM),

    Non-Leveraged Long ETFs:

    Internet (NASDAQ:PNQI), Biotech (NYSEARCA:PBE), Aerospace (NYSEARCA:ITA), Health Care (NASDAQ:PSCH), Industrials (NYSEARCA:PRN),

    Pharma (NYSEARCA:PJP), Transports (NYSEARCA:XTN), Small Caps (NYSEARCA:RZV), S&P 500, (NYSEARCA:RPV), Small Caps (NYSEARCA:RWJ),

    Regional Banking (NYSEARCA:KRE), Capital Markets (NYSEARCA:KCE), Health Care (NYSEARCA:FXH), Industrials (NYSEARCA:FXR),

    Biotech (NYSEARCA:FBT), Small Caps (NYSEARCA:SLY), Discretionary (NYSEARCA:XLY), Transports (XTN).

    Leveraged Bear ETFs:

    Oil 2x (NYSEARCA:SCO), Real Estate 3x (NYSEARCA:DRV), Nat Gas 3x (NYSEARCA:DXD), Emerging Markets 2x (NYSEARCA:EEV),

    Oil & Gas 2x (NYSEARCA:DUG), DOW 30, 2x (DXD), Materials 2x (NYSEARCA:SMN), Emerging Markets 3x (NYSEARCA:EDZ),

    S&P 500, 2x (NYSEARCA:SDS), Financials 2x (NYSEARCA:SKF), China 2x (NYSEARCA:FXP), Energy 3x (NYSEARCA:ERY), DOW 30, 3x (NYSEARCA:SDOW), NASDAQ 2x (NYSEARCA:QID), Russell 2000, 2x (NYSEARCA:TWM), Small Caps 3x (NYSEARCA:TZA), S&P 500 3x (NYSEARCA:SPXS), Financials 3x (NYSEARCA:FAZ), Semis 3x (NYSEARCA:SOXS), NASDAQ 3x (NASDAQ:SQQQ).

    Non-Leveraged Short ETFs:

    Emerging Markets (NYSEARCA:EUM), DOW 30 (NYSEARCA:DOG), S&P 500 (NYSEARCA:SH), NASDAQ (NYSEARCA:PSQ), Russell 2000 (NYSEARCA:RWM), Active Bear (NYSEARCA:HDGE), EAFE (NYSEARCA:EFZ), Oil (NYSEARCA:DNO).

    GOOD LUCK!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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