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Liquidity System Sell Signal 8/1/2014

|Includes:IWM, TLT, Financial Select Sector SPDR ETF (XLF)

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Aug 1, 2014 7:20 PM | about stocks: XLF

The Russell 2000 dropped below 1114.62 today, which is 2 ATR's below the level where it was bought on May 27. XLF did not confirm the signal, but it means the system sells IWM (and PTY) today.

System 1 had 833 shares of IWM. At 3.55 p.m. the shares were $110.63; so that fetched $92,154. The shares also paid a dividend of $.46; so that's another $383 = $92,537. At 3.59 p.m., TLT was at $114.58; so 807 shares were bought.

System 2 had 420 shares of IWM = $46,464 plus $193 in dividends =$46,657. The system also had 2544 shares of PTY, which had a price of $18.14 at 3.55 p.m. So that fetches $46,148. Two dividends totaled $.26 = $661, for a total of $46,809 from PTY, and a grand total of $93,466. That bought 815 shares of TLT at $114.58.

The first signal since I started posting the system was a sell on Feb. 3, 2014. That day the Russell closed at 1094.58. Including dividends, today's close of 1114.85 is equivalent to a total return of 2.55% since then. System 1 is down 7.46%, and system 2 is down 6.53% in that time frame.

Maybe you can't time the market, but I am persisting. Bull markets end in lengthy topping processes (usually), that can and do whip-saw many traders and timers. It may happen again because XLF is at $22.21, and the system indicates a buy if it goes above $23.06 at any time during the next 13 trading days.

My own thoughts are that if it does, it's a last gasp. The riskier high yielding assets (junk bonds, master limited partnerships (NYSEARCA:AMJ), mortgage Reits) have dropped sharply in the past few days suggesting a risk-off trade. The R2000 is up 5.2% yoy compared with 12.6% for the S&P 500. French 10-year bonds yield 1.51%, and they are more bankrupt than us, and don't have their own central bank to buy those bonds. It's nutty Margin debt has gone back to its Feb. peak, although I've decided that margin debt is not a great indicator, because it coincides with market moves. It drops when the market drops. The bull-bear ratio for Investor's Intelligence has been above 3 for many months this year. It too is a lagging indicator, in that the percentage of bulls drops when the market drops, and rises when the market rises. But, who is left to buy stocks, especially when the Fed is slowing the rate of infusion of liquidity.

Finally, August and September in the second year of the Presidential cycle is usually bad. There's no good reason why it should be, except that it is now well known that this has happened in the past, and so it's another incentive to step aside.

Disclosure: The author is long TLT, NLY, REM.

Stocks: XLF, TLT, IWM

Disclosure: The author is long TLT, NLY, REM.

Stocks: XLF, TLT, IWM