In this edition of “Bull or Bear,” we will examine the cycle, then consider if it’s time to take profits into strength. Should we move those assets to sectors most likely to receive new capital flow? Or, should we consider other options like bonds?
Bull or Bear – The Cycle
The S&P500 is beginning to show a deceleration. And, as the rate of change slows, so goes the markets. When the cycle forms an apex, we begin taking profits and scaling back long positions. Fewer breakouts occur at this time, so we’ll wait until the cycle forms a bottom to put cash to work again. Seasonality is more bullish into October and November, so everything is working for a setup into the fall.
Is it the chicken or the egg? At first glance, a trader might look at the chart above and say “the cycle is following price action. To an extent, that is true, however, when the rate of change begins to slow and change direction, the momentum of price sometimes stalls and turns later. We see that in May, June and in late July. Price did not give in to the change until a few days later. Put another way, the cycle gives us time to exit positions before the change becomes obvious to others.
Double Bollinger Band Strategy
This strategy is straightforward. We have two standard deviations shown. The darker is standard deviation one, and while price remains outside standard deviation one, we assume the trend will continue in the prevailing direction. Once price closes inside standard deviation one, it triggers a sell signal, in the current scenario.
Targets are previous breakout zones and pivot highs. Therefore, a pullback to 247.00 (+/-) would be our first likely point of return on a failure in the short term. This represents a 1.26% drawdown.
Sentiment
The final straw is sentiment. We can measure institutions appetite for risk by watching TICK cumulative. The only way this indicator in the bottom panel can continue rising is if, institutions are buying more on the uptick than they are selling on the downtick. And, the best part is we see it in real time. It’s not a lagging indicator. We haven’t seen a bear cross since last year.
Caveats do exist, as financial, energy and material stocks undergo their own cycles. That said, a move lower in the major index would affect these sectors as well. Stocks that do not pull back in the next cycle lower would be earmarked for relative strength plays in the next cycle up.
T-Mobile and Sprint are higher this morning. TLT is green as well. In addition, fewer stocks are green in the pre-market, a change of character that is often associated with the aforementioned cycles. So, are you a bull or a bear?
Have a great weekend,
Vinny