Daily State Of The Markets: Tough To Get In

Includes: SPY, SSO, UPRO
by: David Moenning

Good morning. One of the most difficult aspects of managing money is to get new money invested when stocks are in rally mode. Unfortunately, not all clients and/or subscribers begin on January 1 each year. No, some people insist on putting their money to work at times other than the beginning of a month, quarter, or year. As such, it can be challenging to find a good spot/time to bite the bullet and get this new money "in line" with your current strategy.

Such is the case right now. Our active risk management strategy went long the stock market on July 26 via the SPY and then added leverage to our more aggressive accounts (via SSO and UPRO) on July 30. Although buying into what was, at the time, a nightmare environment, in which the market had been responding wildly to every headline, comment, and/or rumor out of Europe, I don't ever have a problem blindly following the buy and sell signals given by our systems. While not every trade turns out the way I'd like, I know that sticking to the system has a tendency to pay off in the long run. And it is for this reason that I have no problem sitting through a few clunker trades in a row while waiting for a trade like the current one to come along.

Everybody knows that the idea is to buy low and sell high in this business (and vice versa for those inclined to play the short side of the game). And most everyone that has ever clicked the buy/sell button knows that it is best to add or initiate new positions on weakness. However, sometimes it is tough to find a "buy low" (or even a "buy the dip") opportunity. And to be sure, this is one of those times.

Since July 26, hindsight indicates there have been exactly two opportunities to initiate positions on weakness. There was the three-day bout of selling between July 31 and August 2, where the S&P pulled back a whopping 1.47% over a three day period (or 2.26% on an intraday basis). And then there was the "sloppy period" between August 20 and September 5, where investors had ample opportunity to buy a red day. But unfortunately the total drop from the 8/17 high was just 1.3%.

The real problem with trying to buy a dip in this market is that when the dips come - modest as they may be - they are accompanied by negative headlines about growth slowing around the globe, or unrest in the Middle East, or the latest headline in the Europe debt mess. As such, those without an iron stomach may find it difficult to believe wholeheartedly that the market isn't simply going to return to the bad-old days the next time the algos start selling in earnest.

For the record, I am speaking from personal experience here. While our systems did a great job of calling the current move and yes, it was difficult to pull the trigger on July 26 and again on July 30, it has been even tougher to get new money "in" lately. The problem is that not everybody has the discipline to follow the signals religiously. So, we get calls saying, "Hey, I missed it. What do I do now?"

So, with the S&P 500 market up more than 14% since the June 1 low and the macroeconomic picture still keeping many investors fearful as to what comes next, the question remains: How do you get in during this type of environment where the market blasts higher, then pauses for a spell, and then blasts higher again when you least expect it.

Unlike the big Wall Street firms, who to this day don't understand the concept of a "sell" rating, we have four market ratings that we use to help us in these types of situations. Each and every day we put a rating on the market for new clients/subscribers. The idea is to ask the following question each morning: What would we do if we didn't have a position in the market at this point in time? The ratings we offer are: "Buy" - meaning that we would be willing to establish a new position, right here, right now, "Accumulate" - we would establish a "starter position" here with between 25% and 33% of the total target position and then add in increments on weakness - as long as our models remain positive, "Hold" - we would not establish new positions here (this occurs when the market has spiked higher or our models are faltering), and "Sell" - meaning that we are looking for an opportunity to exit the position.

What is our rating this morning, you ask? As I've stated, it is indeed tough to get in here. For example, yesterday's rating was "accumulate" and the market did "dip" for a while. But unfortunately for anyone looking to establish new positions, the "dip" only lasted a couple hours and the S&P didn't even pull back 1%. However, since our cycle work tells us that stocks tend to pull back during the middle of September and our view of the technical picture suggests that we've got a "sloppy" period (i.e. a consolidation phase) on our hands, the "Accumulate" rating stands today.

So, while it has been tough to get in, if we were not invested at this stage, our strategy would be to establish a "starter position" and then add on weakness - assuming we see any weakness for more than a couple hours, that is. But again - and this is key - we reestablish our "new money" rating on a daily basis. Thus, if our Market Environment Model starts to weaken, we will go from "Accumulate" to "Hold" in a heartbeat. But for now, we're still looking for opportunities to get un/underinvested people into our current long trade.

Another way to go when you miss a signal or begin to implement a new system mid-trade is to either "bomb in" and take your chances, or wait for the next signal.

I fully understand that I have not provided any magic solution here. But it is my sincere hope that my review of how we approach the current market can help anyone struggling to figure out what to do with new money in this market environment where it is simply tough to get in.

Turning to this morning ... It's a quad-witch expiration Friday. The good news is that the last 8 of these events have produced green screens at the close. In addition, while 14 of the last 15 Monday's have been negative, the last 8 Friday's have been positive. And so far at least, the overnight markets and the U.S. futures are keeping this pattern alive.

On the Economic front ... There are no economic reports scheduled for release this morning.
Thought for the day ... What it lies in our power to do, it lies in our power not to do. -Aristotle
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell ...
  • Major Foreign Markets:
    • Australia: +2.20%
    • Shanghai: +0.11%
    • Hong Kong: +0.70%
    • Japan: +0.25%
    • France: +0.26%
    • Germany: +0.72%
    • Italy: +0.91%
    • Spain: +1.26%
    • London: -0.16%
  • Crude Oil Futures: +$1.18 to $93.60
  • Gold: +$9.70 to $1779.90
  • Dollar: higher against the yen, lower vs euro, and pound
  • 10-Year Bond Yield: Currently trading at 1.777%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +4.69
    • Dow Jones Industrial Average: +46
    • NASDAQ Composite: +8.70
Positions in stocks mentioned: SPY, SSO, UPRO