The Faber Signal for Long-Term Portfolios and Current Conditions
We have discussed the Meb Faber signal recently amongst the team members as the October selloff began to accelerate. For a more detailed explanation by Urban Carmel, aka @Ukarlewitz, you can read about this long-term trend signal that triggered as of the October closing print. It is the monthly signal or trigger that we are interested in discussing as we start the month of November.
Summary
Faber Signal – Monthly 10sma
One of our members recently asked the question, paraphrasing “are you the one who uses the monthly 10sma?” The answer, of course, was yes. We found this signal very useful before and after the 2015 drawdown. On October 24th, we said we needed to “see how the signal closed for the month.”
S&P 500 Faber Signal – Monthly Chart
Considering the market has already pulled back more than 10% at this juncture, we would entertain a bounce before doing anything with our long-term positions. We may need to rebalance. For now, we anticipate an oversold bounce into one of the most seasonally bullish months of the year.
Faber Signal 2015. Note how fast the market bounced in August 2015, before dipping again to end the year lower. Will we bounce in similar fashion this time? Watch institutions for the answer.
A Fibonacci retracement of 38.2% would bring us back to what appears to be the neckline of a major head and shoulders top.
MACD is turning over as well, so momentum has turned more bearish.
NYSE Extremes – HiLo Percent
Looking back to the February 2016 period, we note the HiLo indicator was severely oversold at the time. Today we start the month at 5%, a washout low by anyone’s measure. Price action reached the 38.2% Fibonacci and bounced. Stochastic is oversold and turning.
While we will not predict a move in either direction, the probability that we get more oversold seems rather slim.
The major caveat, of course, is the mid-term elections next Tuesday.
If you followed our lead into the September peak, you were selling (taking profits) into strength.
Speaking to many of the members, we can confirm many are holding large cash positions. As we told members, we are doing very little until “after” the elections. Once we see the markets reaction and institutional sentiment, we can act with more certainty.
Our game plan remains; trade smaller with tighter stops. Follow fewer positions and trade quality.
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Happy Trading,
Vinny
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