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Tony Roylance
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I am a St. Louis-based independent and fee-only Registered Investment Advisor (RIA). My passion is market research and strategy development. I look forward to talking with other investors and traders. I am always up for a chat about the market, feel free to contact me at... More
My company:
MCR Capital Management
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MCR Capital Management
  • Market Update For January 24, 2014 (One Week Delayed) 0 comments
    Feb 1, 2014 10:08 PM | about stocks: SPY, IWM, MDY

    What a week! Friday brought the worst day for the market in a long time, with the major indexes down between 2.5-3% The million dollar question is, is this the beginning of a correction, the beginning of a bear, or a dip to be bought? As system traders we must maintain the discipline it takes to invest with our system through periods like this. The system we use has been tested against the Asian Crisis of 1998, the dot.bomb era of the early 2000′s, 9/11, Iraq War, and the financial crisis of 2008. According it testing it would have kept us relatively safe with only minor drawdowns in our capital.

    Let's begin by looking at some very concerning charts:

    First, the New Quarterly Lows indicator on the Russell 3000 index (the best index for overall market health), has gone absolutely parabolic! This much damage so quickly is rare, and when it does occur, usually occurs at the beginning of a correction.

    (click to enlarge)

    The next indicator that has me very concerned is the amount of down volume on the Russell 3000 (again, the best proxy for the overall market). The amount of down volume that occurred on Friday was similar to the amount that led to a significant correction in 2011, and occurred right before the crash in 2008. This is extremely concerning, and a sign that this wasn't just profit-taking, this was near-panic to get out.

    (click to enlarge)

    Finally, let's look at our indicators for the major averages. All of them are still indicating to be in the market at this point.

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    Given the sheer intensity of the selling, the fact that we are overdue for a correction, and the fact that our proprietary indicators are indeed weakening, it appears that a correction has begun. To put things in perspective, however, the market is only back to where it was 8 days ago, and still only a few percentage points off of all-time highs. There have been comparisons and worry that we could experience another 1987-type crash, where the market dropped over 20% in one day. To put some minds at ease, following that event, President Reagan formed what's called the President's Working Group for the Financial Markets, also known as, the Plunge Protection Team. Should the market begin to sell-off to an extreme degree and very disorderly fashion, Federal Reserve traders at the FRB of New York can step in with unlimited buying power and leverage to support the markets. If next week is also a major negative week, I imagine at that point our indicators will flip negative and we will get out of our positions and into the safety of cash/money markets.

    Let me know if you have questions, email me at admin@401ktactical.com.

    Enjoy the Weekend

    Disclosure: I am long SPY, MDY, IWM.

    Stocks: SPY, IWM, MDY
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