SO, IS THIS THE END OF THE RALLY? I DON"T THINK SO.

May 04, 2016 7:07 PM ET2 Comments
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Long/Short Equity, Special Situations, Currencies

Contributor Since 2009

Michael J. Clark was born and raised in Sinclair, Wyoming. He is a poet, novelist, artist, historian, and market analyst. He began investing in 1985. He read ˜The Technical Analysis of Stock Trends" by Edwards and Magee and was hooked. From 1985-1987 he made astonishing gains in the stock market; and then stocks collapsed in 1987. Since then he has been attempting to 'solve the stock market', with many failures and some successes. The system he developed, called CGTS, Clark's Gate Timining System, is algorithm-based. What this fancy word means is that he proposes a series of necessary steps based on technical analysis propositions, which, when met, trigger trading signals. His four main trading systems are up a combined 31% for 2015. From his website: INVESTMENT PHILOSOPHY Now that QE is supposedly ending, markets are already becoming more tradable, with opportunities to make money on both long and short trades at the same time. QE tended to make all boats rise, except precious metals. This made it more difficult to play the short side of the markets. Now, both sides seem to be more accessible to successful trades. This will also be more of a challenge for investors. The FED will have to eventually abandon the markets to their own destinies, and stop spending trillions to protect investors AND corporations from their mistakes. As this begins to happen (I am not sure it has happened yet), informed advice will become even more necessary for investors. Rules of Investment Rule #1: Never go against the trend. The majority is often wrong; but the minority is often wrong also. The sticky issue with this advice is at transition points, at which a Bull Market turns into a Bear Market or vice-versa. Big Money often anticipates and/or causes this transition. So pay attention to what Big Money is really doing, not what they say they are doing. Rule #2: You don’t need a broker who makes his living off of your money. Most brokerage firms buy a position in a stock quietly and slowly. When the stock has appreciated significantly they add the stock to their buy recommendations. Then they begin selling their position while they are encouraging their clients to buy the stock. Most firms never issue sell recommendations. If they do, beware: they are probably trying to buy your stock after a huge sell-off. Rule #3: Watch your own emotions because they are often signaling something. When fear turns to greed and visions of unlimited wealth, we are probably near a top in a trade and we should get ready to sell. When hope and denial turn to fear and visions of an unlimited loss, we are probably approaching a bottom in a trade. (See Rule #1 however.) Rule #4: Trade with a system to complement your gut reactions. Follow the system no matter what, even if it means taking a loss. Don’t get lazy with your money and sink into denial. Use a system to help you refrain from 'playing a hunch'. Rule #5: HEDGE YOUR PORTFOLIO AGAINST LOSSES. How does one do this? By having a balanced portfolio of long and short positions. But have a system that signals both long and short positions, and keep your portfolio balanced around 50% long and 50% short. This may seem to contradict Rule #1. It does not. When something is in a long trend, something else is in a short trend. Find what is long and what is short. If stocks are long, gold or oil may be short. Use ETFs and options to help establish this portfolio balance. Our system gives trading signals every day for both long and short positions. More information on CGTS is available at: http://home.mindspring.com/~mclark7/CGTS142.htm His fine arts portfolio can be found at the following address: http://www.hoalantrangallery.com/MJC2.htm His writing portfolio can be found at: http://www.hoalantrangallery.com/MJCwriting.htm Those interested in his book "Turn Out the Lights", a description of the metaphysical causes of the 2008 financial meltdown, can access the draft at: http://www.hoalantrangallery.com/Turnoutlights.htm Michael Clark has retired after working 30 years in academia, relocated to Hanoi, Vietnam for six years, and has returned to America in 2014.


CGTS: THE NEW SCIENCE OF INVESTING

OK. The sellers have re-arrived. We know we have to be cautious. SELL IN MAY AND GO AWAY; is that a truism, a trite truth? Maybe. I am not panicking here. Let's look at the VIX. This is THE anti-stock gauge, is it not? The VIX races higher when stock selling becomes dynamic. And it's true that the VIX did break up out of the CGTS PROP1 SELLINGZONE. Break up? No. Eased up through, is a better characterization. Let's look at the chart:

Note that the PROP1 explodes up above -7 up toward +25 in a real bullish move. Any move that simply breaks -7 and lingers there is indecisive, of two minds. Note also the bottom pane. M4 21 is supposed to rise above zero in a real rally. So far, this movement has not happened. That does not mean it will not. It still could -- it could be a late-arriving energy. At this point, I would say "Stock Selling Energy" is muted. This could/can change.

However, the first wave of selling is about over. We look at the same chart-setup with UDOW, Bullish Dow ETF, with only one new indicator added, M2F ALT, a short-term momentum gauge. UDOW is oversold, in terms of this indicator. What does this mean? True, an oversold condition does not mean it is necessarily ending or read to reverse. A stock can stay oversold for a long time.

UDOW is still in the BUYZONE. Not M4 21 is above zero, which is what we expect from a bullish market move. Let's look at UDOW in the monthly chart.

Clearly, the monthly wants to go higher. The VIX Monthly Chart shows a trend in a down-channel suggesting a VIX heading lower.

I will write more about portfolio balance in the next few days. At the moment I do not have very good portfolio balance. The idea is to have a good balance between LONG and SHORT positions. This allows for the portfolio to gain even when selling hits. The KEY to this, of course, is to be Short only those stocks in a Bear Market, and Long only those stocks in a Bull Market. Every day we update our reports with an eye on just that. How many SHORTSELL signals are we getting. In a Bear Market we will get many more SHORTSELL than BUY signals. Our portfolio, today, is not balanced because we are not getting many SHORTSELL signals. Our PROP1 LOOKBACK portfolio, up 15.9% this year, heavily dependent on our PROP1 indicator, has 22 Short positions currently, and 45 Long position. Many of these Short positions are inverse ETFs -- shorting the short -- so they are, in fact, long. We have some inverse ETFS on our Long List also -- in fact, short positions. But here is a list of that portfolio:

Column1 Column2 Column3
     
Long ^DJT Dow Jones Transport Index
Long ^FCHI CAC French Index
Long ^GDAXI DAX German Index Daily
Long AMSC American Superconductor
Long BCRX BioCryst Pharmaceuticals
Long BRZU * Brazil Stocks Bullish ETF 3x
Long BYD Boyd Gaming
Long CLF Cliffs Natural Resources
Long CLR Continental Resources
Long DAKP Dakota Plains Holdings
Long DGAZ * Natural Gas Bearish ETF 3x
Long DSX Diana Shipping
Long ECR Eclipse Resources Corp
Long ENZN Enzon Pharmaceutical
Long FFIV F5 Networks
Long FIT Fitbit
Long FNMA Fannie Mae Daily
Long GASL * Natural Gas Stocks Bullish ETF 3x
Long GAZ Natural Gas ETF
Long HPQ Hewlett Packard Daily
Long IDI Tiger Media
Long INDL * India Stocks Bullish ETF 3x
Long IO Ion corp
Long LIFE TYR Pharma
Long LNKD Linked In
Long RH Restoration Hardware
Long RIG Transocean Ltd.
Long RTN Raytheon
Long SGG Sugar ETF
Long SNDK SanDisk Corp
Long SOXS * Semiconductor Stocks Bearish ETF 3x
Long SRPT Sarepta Therapeutics
Long SRPT Sarepta Therapeutics
Long SWN Southwestern Energy Corp
Long THLD Threshold Pharma
Long TOO Teekay Offsore Partners
Long TPUB Tribune Publishing
Long TSLA Tesla Motors Daily
Long USAC USA Compression Partners
Long UWTI * Crude Oil Bullish ETF 3x
Long UWTI * Crude Oil Bullish ETF 3x
Long WLL Whiting Petroleum
Long WLL Whiting Petroleum
Long YANG * China Stock Bearish ETF 3x
Short ^N225 Nikei Japan Index
Short AGN Allergan PLC
Short BTU Peabody Energy Corp
Short BZH BEAZER HOMES
Short BZQ Short Brazil Shares ETF
Short CYTX Cytori Therapeutics
Short DRYS Dry Ships Daily
Short DSLV * Silver Stocks Bearish ETF 3x
Short DTO Short (Double Short) Oil
Short ERY * Energy Stocks Bearish ETF 3x
Short EVEP EV Energy Partners
Short FDS Factset Research
Short GASX * Natural Gas Stocks Bearish ETF 3x
Short GS Goldman Sachs Daily
Short HTZ Hertz
Short IBB Biotechnology ETF Daily
Short ILMN Illumina Corp
Short JDST * Junior Gold Miners Bearish ETF 3x
Short QLTI QLT Inc (Biotech)
Short REGN Regeneron
Short SPU SkyFruit Juice China
Short UGAZ * Natural Gas Bullish ETF 3x

Note how volatile the Inverse x3 ETFs are: we are short GASX, Natural Gas Stock Bearish (short the short, or long) and we are short UGAZ, Natural Gas Bearish (short the long, or short). Natural Gas really can't make up its mind what it wants to do. Also note that the Japanese NIKKEI index has gone negative, about the same day that we took on a long FXY, Japanese Yen ETF, position (in one of our other trading portfolios). We think the Yen is making a long-term trading bottom.

So, in summation, since we don't think this is the big sell-off --it MAY be, it only is not YET, so we need to keep watching -- what are we thinking about buying? Well, we love the precious metals through 2019: so gold and silver are on our watch lists. One gold stock we are watching is HMY, Harmony Gold, for ourselves and some of our readers. We want to buy AAPL, Apple Computer; we think its selloff IS a buying opportunity, only not yet. We want to shortsell VRX, Valeant Pharmaceutical, which Warren Buffet and his 90-year old partner recently trashed in the Omaha Woodstock Nation retreat -- only not yet. This shows you how "timing is everything' in the stock market. Fundamentals teach you about business; technicals teach you about investing. These knowledges ARE NOT mututally exclusive obviously. But running a business successfully and investing successfully are not the same things.

Apple and Harmony are buys, only not yet; VRX is a shortsell, only not yet.

The closeup of VRX shows the battle being waged between buyers (31.34; now 34.75) and sellers (35.75). If buyers can break up above 35.75, then they win this battle -- not the war, but the battle. If sellers turn back buyers short of 35.75, then sellers win the battle and get their way for awhile.

I have recently developed a new algorithm that seems to use Resistance and Support levels in a new trading system effectively. Both short-term and intermediate-term systems have been successful in trading. If they continue to be successful, we will unveil them in the near future.

Best trading -- and best HEALTH. Health comes first, in fact.

MJC, CGTS

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