Wednesday , October 16 2019

Stay cautious

Summary:
Mid-week market update: I highlighted a tactical trading sell signal from the VIX Index on the weekend. The VIX had fallen below its lower Bollinger Band,, indicating an overbought market, and mean reverted above the band last Friday.  As a reminder, the historical study of such episodes since 1990 show negative returns bottom out roughly a week after the signal, which would be this coming Friday.  I stand by my trading call for a tactical defensive posture.  Bearish warnings Other measures of sentiment show a wide range of disagreement. On one hand, the latest Investors Intelligence sentiment shows that optimism is building. Bullishness as risen past past the 2019 peak, and readings are similar to levels last seen in October 2019.  On the other hand, the TD-Ameritrade

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Mid-week market update: I highlighted a tactical trading sell signal from the VIX Index on the weekend. The VIX had fallen below its lower Bollinger Band,, indicating an overbought market, and mean reverted above the band last Friday.
 

Stay cautious

As a reminder, the historical study of such episodes since 1990 show negative returns bottom out roughly a week after the signal, which would be this coming Friday.
 

Stay cautious

I stand by my trading call for a tactical defensive posture.
 

Bearish warnings

Other measures of sentiment show a wide range of disagreement. On one hand, the latest Investors Intelligence sentiment shows that optimism is building. Bullishness as risen past past the 2019 peak, and readings are similar to levels last seen in October 2019.
 

Stay cautious

On the other hand, the TD-Ameritrade IMX shows a high degree of defensiveness.
 

Stay cautious

However, Ned Davis Research has helpfully compiled an aggregate Crowd Sentiment Index, which shows a high degree of bullishness that historically has led to subpar returns in the past.
 

Stay cautious

There are more potential potholes ahead for equity investors.The recent market weakness does not appear to be complete. Short-term breadth is falling, but the readings as of Tuesday night’s close is nowhere near an oversold condition, indicating further short-term downside risk.
 

Stay cautious

As well, the weekly chart shows the market approaching a key overhead resistance level while flashing a negative divergence on the 5-week RSI – which is another warning sign.
 

Stay cautious

None of these conditions necessarily mean that the market will go down tomorrow, or next week. However, they do argue for some tactical cautiousness until we see greater clarity of the fundamental outlook from Q2 earnings seasons.

My inner investor remains neutrally positioned. My inner trader is maintaining a small short position.

Disclosure: Long SPXU
 

About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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