The Problem With Flying (XLP,DIA,TLT)

The Problem With Flying (XLP,DIA,TLT)

 

There are a few things that kinda trouble us these days, but none so much as the technical picture of the Dow Jones Industrial Average, whose daily, weekly and monthly charts are all now spinning through lala-ville, overbought every darn j-candle of them, and presenting the very picture of a dead man walking.

 

So it is.

 

And we have to acknowledge the reality.

 

But before we turn to the actual charts, know that neither the S&P 500 nor the NASDAQ are as bloated as the Dow.  Know, too, that the Dow Transports and the rest of the world’s major market indices are also nowhere near the froth-flood we see on the Old Lady of New York.

 

And we’ll have more to say on that in a moment.

 

But first, take a look at the Dow’s daily paste-up –

Here, you see a picture of some 1500 points achieved in under just eight weeks (in blue), a relentless juggernaut of a climb that rarely saw a down day and pushed the index’s Relative Strength Indicator (RSI) high into overbought territory for almost a full month (in green).

 

What the…!?

 

As far as action on a major index goes, this kind of buying is almost NEVER seen.

 

Now look at the weekly chart, and in particular the gains that have accrued over the last 22 months –

This, too, is unprecedented – at least in the current bull market.  We have a 50% gain on the index in less than two years that has also forced several near overbought signals and one clear overbought RSI WEEKLY reading (in green) just last week.

 

When both the daily and weekly RSI measures are overbought, we have a serious situation that requires action – if not an outright short, at least a reduction in our long positions.

 

But when the monthly chart is also presenting an overbought RSI, as it currently is, we have every reason to batten down the hatches and encourage our secretary, Maybelline, to engage with us in some mutual deep vein thrombosis.

 

Have a look –

This is where it gets downright panicky.

 

To begin, check the volume of trade since the election, a condition that has never obtained during this entire bull market that began back in March of 2009 (black square).

 

Nor, more importantly, have we seen a MONTHLY RSI overbought condition (in green) since before the bull market began.

 

The last time we experienced anything even close to a +80 mark from the MONTHLY RSI was back in the summer of 2007, directly before the market peaked and subsequently sold off 50% in what has come to be called the Lehman Bros. (or ‘sub-prime mortgage’) crisis.

So what’s the takeaway?

 

According to our read of the charts, the Dow Jones Industrial Average should be headed for a multi-year bear market that could wipe another 50% off its current value.  That is, after all, what happened the last time we saw a triple RSI overbought condition on a major asset class – the precious metals – back in 2011.  Silver and gold both entered a prolonged bear market from which they’re only now beginning to emerge.

 

And yet we have our doubts.

 

On the one hand, the way the market is currently vectored, we could see the Dow, and, indeed, all the other major markets, continue in their overbought ways for weeks or even months before a meaningful bout of selling occurs.

 

On the other hand, we could experience that same selling now – but we could be entirely wrong regarding its duration.

 

As we’ve mentioned many times in this space, we’re living in different times, with the market subject to a host of external influences and inputs that it has never before dealt with.

 

With governments and central banks the world over willing to intervene during a selling crisis, we have no idea how long a bout of liquidation might last before the ‘responsible parties’ at Treasury or the FED decide they’ve had enough.

 

The willingness to backstop a selloff for the sake of ‘the nation’s greater good’ has never been so pronounced.

And yet we can’t ignore the data.

 

Which means the action we take has to be both deliberate and measured, and we have to be ready to respond rapidly to any potential shift that occurs.  Because the next moves are sure to be jagged and swift, and profiting from them will require a deft hand and a spirit that’s unfettered by any single investment bias.

 

To conclude, we do not believe that the bull market has breathed its last.  Nor do we incline to those who claim that it’s straight up from here.

 

Running Down an Open Trade

 

But before we suggest a trade based on the foregoing, let’s look back at a single initiative that requires your attention.

 

It was opened on September 7th in a letter called NORTH KOREA PIZZERIA BALLERINA SHOP IKEA and recommended, among other things, that you sell four (4) TLT October 20th 124 PUTs for $0.50 each.

 

As it turns out, TLT closed last week a proverbial two cents short, at $123.98, meaning we’re now proud holders of four lots of TLT at $124.

 

And what are we doing?

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And now for this week…

 

There’s one sector that has not kept pace with the Dow during its latest race to the top, and that’s the consumer staples.  As the chart below shows, the two broke ranks at the beginning of June, and it has been a mean split ever since.

There’s nothing wrong with the big consumer staple stocks, as represented by the Consumer Staples Select Sector SPDR ETF (NYSE:XLP) or with the prospects for the sector as a whole, as far as we’re concerned.

 

Just Wall Street doing its rotator dance.

 

So…

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You make money on the staples outperforming the Dow.

 

Many happy returns,

 

Matt McAbby

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