Hang on, brothers. The pace is picking up.
And because of that, we’re reminding you of a couple of ironclad laws of investing to help see you through the journey.
Back on October 23rd we wrote a letter called The Slide is Complete, in which we argued that a Dow Theory ‘Buy’ signal was imminent and markets would steam ahead as soon as an official confirmation was registered.
And it didn’t take long.
Sure enough, since the Dow bottomed last month at 15,850, the index climbed a whopping 12%, registering an all-time closing high on Tuesday of this week at 17,735. The NASDAQ is up almost 15%, and bullish sentiment, according to the American Association of Individual Investors (AAII), has also gone stratospheric.
And it’s that last item that scares us.
Because sentiment is destiny.
And even if we get higher than normal bullish numbers going forward (due to the massive liquidity in the system), we also have to be wary of a snap-back selloff. In fact, as this final, greatest of all bull markets lurches toward its ultimate peak, we should expect just that – wild swings in sentiment that correspond with increasingly erratic ziggedy-zag action on the charts.
As for the charts themselves, we don’t like what we see there, either – particularly from the Dow, where the action looks very much like it did before several quick dives we remember from the mid-1990’s.
Look here –
• There’s been no volume of late (in blue),
• Volatility has dropped significantly (in black), and
• Intraday trading ranges have been dramatically stunted.
All of which has produced action that resembles a quick rollover top in progress (in green).
And that, too, worries us.
McAbby’s Second Law of Cognitive Acrobatica
The week after we mused about a Dow Theory BUY signal, we spoke of continuing strength in the dollar and more weakness from the precious metals. The letter was called The Barbaric Bull’s Self-Feeding Dollar Loop, and there we wrote –
“Global investment flows will therefore continue to favor American assets, which in itself will spur the dollar higher, inviting more pure currency purchases that will induce further buying of U.S. assets in a self feeding loop that we estimate will push the Dollar Index to at least its last retracement high in the 89 – 90 range before pausing for breath.”
And lo and behold, that’s precisely what happened. The Dollar Index immediately moved to a new plateau, registering new multi-year highs at 88.26 and bringing us to within spitting distance of those overhead resistance levels mentioned above.
Looky here –
This, too, has us worried.
Not because we think the bull is over.
No way. There’s still lots more money to be lost before that happens.
Rather, because we don’t want to miss out on a quick moneymaking opportunity if the markets decide to tank here temporarily.
And that could be exactly what happens if the dollar begins to slide on a broad profit-taking event that scares people (again, temporarily) out of American assets.
That’s THE Great Overlord and Savior, to you, Barbie…
To begin, go bathe in this mélange of fruit juices and wine consider the recent cold snap, massive snowfall and the devastation it has wrought. Consider, too, that it’s only November and we have a lot more winter ahead of us.
And finally, consider that no one expects the worst until it has literally landed on their heads.
Now look here –
This is the chart of the United States Natural Gas ETF (NYSE:UNG) for the last half year.
Everyone knew the weather was coming, and apparently UNG’s price began to rise a few weeks back in anticipation (blue line at top).
Then, just before the actual smack of the polar vortex, there was a selloff, followed by a quick run to new highs that brought us BACK ABOVE ALL THE MAJOR MOVING AVERAGES for the first time since June (red circle).
That move was accompanied by a surge in volume (in black) and the return of both RSI and MACD indicators above their respective waterlines (blue boxes), all of which leads us to believe that the bottom is now locked in for gas, with strong support at $21.50, in line with the long term moving average.
For that reason, we’d consider setting an inter-market pairing using gas and the Dow (DIA) – long PUTs on DIA and short PUTs on UNG.
Go out to the middle of winter, we say, and find strikes that are offsetting in price.
Then light a fire and drink that mélange.
Many happy returns,
Matt McAbby, Senior Analyst, Normandy Research