Price Rules, Your Opinion Drools
I am amazed at all the punditry happening this month as the stock market does exactly what the stock market should do. That is, make as many people as uncomfortable as possible.
That means all rules still apply. Sure, maybe some of them must adapt to a world full of derivatives and a zillion ways to express your bullish or bearish leanings. But the basic underpinnings of market psychology and human behavior remains steadfast.
Now, everyone has their panties in a twist over a possible Dow Theory sell signal. I’ve seen headlines like “A Dow Theory ‘sell’ signal could happen any day now” and “The stock market is on the brink of an absolute breakdown.”
Um, OK. Everyone has an opinion (me, too)
Embedded in there is the writer going mental over the 200-day moving average. The thing about the 200-day average is first, it is random. There is nothing in natural market law that says 200-days is magic.
It got its start a long, long time ago, likely as a proxy for a nine-point-something-month cycle and got picked up by a guru or two. Then, charting vendors put it into their systems as default – just like a 14-day RSI. From then on, it was the holy grail of stock market trend following.
Why not a 205-day average? Or 188-day? And does it matter that trading hours and even trading days have changed over the years? Does after-hours trading not matter? Yes, I get that the close is the most important point but markets are a whole lot more fluid now with futures settling later and derivatives trading (almost) all night.
Dow Theory is a real thing and it should be, but if it fires a signal, everyone sees it.
Again, I have whined over the years how the Dow Industrials are only a fraction of actual industrials. And how the transportation of information is a giant part of the economy now. But nonetheless, we watch this one part of the theory where the DJIA and DJTA must confirm each other.
Let me ask a question. Does it matter that if the Dow Theory sell signal happens that the market will already be down some 10% from the January peak? You know, in correction territory. Ugh, another topic for my whining.
What good is a sell signal when the market is already down 10%? It’s like Wall Street analysts downgrading a stock after it hits a 52-week low. Where were they when their followers could actually benefit from a downgrade? These signals often do exactly the opposite – become buy signals.
Here’s my view right now:
The stock market remains in a primary rising trend. The 200-day average is a guide for the trend but not, I repeat not, a sell signal on a close below it. Prices move above and below moving averages all the time – ebbing and flowing - but still making higher highs and higher lows for that particular time frame.
The action since the peak clearly was marked by volatility and that volatility takes time to work itself out. Why? The media, in its ever urgent need to gather eyeballs, keeps fanning the flames. “Bear market coming.” “Amazon is under attack by Trump” “Privacy fears kill the FAANGs.” “Trade war!” “Fed unwinding to send rates soaring”
OK, I made them up but did I really?
I am certainly not locking into a bull market opinion but for now the trend is up. This quarter’s action sure looks like a triangle pattern and triangles generally act as resting places before the trend resumes. Oh, by the way, I do see a rather big sell off coming later in the year. It may happen on a sell signal now but my view is that we’ll see some upside before it happens.
Again, no guarantees but until the evidence actually says otherwise that’s my outlook. And by evidence, I mean a breakdown from the first quarter’s pattern.
To be sure, I am watching all the markets and ratios we chartists follow. Bonds are a bit too strong for a stock rally. Gold is a bit too weak for inflation, which suggests the economy is not all that. The TED spread rising although it is still a ghost of what it was before real problems hit. The yield curve is rather low but seems to be stable – for now. Small caps beating big caps – which is actually a pretty good thing.
There you have it. Price rules. All the other market stuff gives us a little bit of probabilities. And everyone’s opinions are worth a few shares of Pets.com.
Disclosure: No positions in anything covered.