Stress Testing Our Portfolios and 401(k)

The Nasdaq 100 and the S&P500 continued higher, with the COMPQ, DJIA and Russell 2000 closing at record highs. The Dow Industrials rallied 6.376% from its November 4th lows, recorded the Friday preceding the election, closing Tuesday at 19,023.87.

Stress Testing Our Portfolio

When we speak of stress testing our portfolios, we look to potential support levels as prices move higher. We recognize a 5% drawdown as normal price action, in a bullish market. Therefore, as we anticipate the next pullback or reversion to mean, it is prudent to look at these support levels.

VBP support is massive at the 18,690 level. SOTEMA is bullish, as it lags behind price. A pullback to VBP support would equal a 1.75% drawdown. (19,023 > 18,690 = 1.75%) We would then rationalize that any funds we added to our 401(k) at the Tuesday close, could see a similar drawdown. No problem, $100,000 invested would mean we could see a potential loss of $1,750.00 if we pulled back to 18,690.00 or a 1.00% drawdown if we pulled back to the ascending 9ema (18,831). This is a risk we are obliged to take, looking to further gains into the seasonally best months of the year. We are investing, not day trading, so we require a different approach.

indu

Potential Trend Continuation

Now that we have stress tested our portfolio, we look for future catalysts for help propel the markets higher. We acknowledge that prices will pullback in the short term. That said, the NYSE Composite is 3.862% below its all time highs. The monthly chart also looks pretty bullish, with prices rebounding off the ascending 50ma. Additionally, RSI is above 50 and rising. MACD is above the zero line and turning higher, with a hanging man (hammer) printing in November. Buyers addressed the lows with earnest.

nya-monthly

If we consider the bullish scenario first, price action would need to pierce the VBP levels shown on the NYSE Composite chart in the next few months. This would lead to stellar gains in the other indices. By contrast, if VBP remains as resistance, we could see a pullback to breakout zones on all of the indices mentioned above. The dollar is a potential catalyst for the bearish case, should it continue higher.

Breadth is Bullish

NYMO suggests we are at overbought levels. This could continue, as we saw in February and March. The McClellan oscillator peaked above 100, before returning to mean. If NYSE remains on course and the bullish nature of its monthly chart does not change, we should assume we are in for one hell of a Christmas rally.

nymo

Wishful thinking? Perhaps, but it doesn’t hurt the bulls case that we haven’t seen buying like this in years. That said, we realize we are being overly optimistic, so price action will be our barometer. We will be monitoring all of the above in the weeks ahead, so rest assured the we have your back.

We swept some cash ($10,000) to VINIX yesterday MOC. 401(k).

Happy Thanksgiving

Vinny

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We would like to draw your attention to the following important investment warnings. The value of shares and investments and the income derived from them can go down as well as up;
Investors may not get back the amount they invested – losing one’s shirt is a real risk; past performance is not a guide to future performance.

Additionally,That said NYMO is near an inflection zone, where we start to look for reasons to get short. This trend is so strong that its hard to fathom much of a pullback. Billions have been put to work post election. Therefore, any pullback will likely be short lived. The most recent period that I recall trading was the 90’s. Late 97-2000 saw dollar rising along with SPX and INDU.

Advance Decline for both Nasdaq (NAAD)

and NYSE (NYAD) are expanding as you can see. NYMO hasn’t updated yet as this is an EOD chart. NYMO closed at 60.73. If it does what we saw in FEB MAR we could easily see a repeat. I think that is possible given the strength of this move.

Bullish percent still has a ways to go to reach the fever pitch of FEB-APR 2016 bullish trend.

Here is the other thing:

Institutions got in to infrastructure and beaten down AAPL FB GOOGL AAPL stocks while “Main Street” was caught flat footed. Now the average investor is in FOMO (Fear of Missing Out) mode. So each time we vault higher it convinces more people to take the plunge, If using a 401(k) that money settles at todays close, but gets put to work tomorrow or days from now, depending on the fund managers buy schedule. They may wait for end of month to exit losers gain cash then use all their cash to buy their perceived winners into Christmas. They need their bonuses.

Put that all together and I am ambivalent about the prospects for a bearish move of any significance. Al that moeny that was put to work is now support under neath current prices. SPY 218.50.

Therein lies the bears dilemma.

🙂

Stress Testing Our Portfolios and 401(k)