T2108 Update – November 15, 2011 (Clarifying Trading Strategies)

(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 77% (17th day of the overbought period)
VIX Status: 31
General (Short-term) Trading Call: Hold

Commentary
The morning began weakly but ended strongly. The close was quite a surprise given weakness in European stock markets and another sell-off in the euro (at the time of writing, the euro is STILL sliding). Moreover, volatility did not push higher as I expected. Overall, the indicators essentially ended flat with Monday’s close, and I have nothing new to say. If Wednesday does not deliver the strong down day I anticipated for the first half of this week, I will need to re-evaluate the near-term projections. Recall that the S&P 500 tends to ramp its gains after the overbought period reaches 20-30 days long. T2108 is now on its 17th day in this overbought period.

In the meantime, I decided to spend a few minutes clarifying my various outlooks and trading strategies. I have multiple timeframes with multiple trading strategies in play. I suspect readers may sometimes get confused or even conclude that I am saying all things at once.

Overall T2108 Strategy
In the short-term, my T2108 rules dominate any other outlook I have. I typically only use T2108 rules to determine swing trades which, hopefully, last at least 3 days and can last longer if conditions continue to support the trade. I will always be short-term bearish if T2108 is overbought (like now) and short-term bullish if T2108 is oversold.

Remainder of 2011
There are only 6 weeks to go in 2011, but I am still projecting a bullish end to the year…AFTER T2108 works off current overbought conditions. The longer T2108 remains overbought, the more difficult it will be for me to maintain a bullish year-end outlook. Note well this outlook overrides the statistical observation that the S&P 500’s performance from the beginning of the year to Labor Day is HIGHLY correlated with the S&P 500’s year-end performance (see “2007 Update for Post-Labor Day Analysis“). This year’s performance until Labor Day was -9.7%. Current year-to-date performance is 0%.

2012
I am bearish for 2012, but I am not translating that into a price target or range. Such targets require crystal balls so far in advance. For example, one part of that prediction called for a sharp rally going INTO October. The sharp rally did occur..but only after a sharp sell-off into a one-day bear market on October 3rd. The S&P 500 gained 11% in October, but it has stalled out the last two weeks bouncing around in overbought conditions.

While I will not operate with a specific price target for 2012, the bearish outlook does mean that I will be particularly aggressive in building shorts during any overbought periods. I will also hold bullish positions for a shorter time frame on bounces from any oversold conditions. As always, I will re-evaluate the projections if necessitated by changing technical conditions.

Commodities
Unlike most everything else, I buy commodities on the fundamentals. In an era of competitive devaluation, money-printing, growing populations, and increasing wealth of the world’s middle classes, commodities are my favorite asset class. I have written several posts on the strategy here: “Preparing for Profits in a Resource-Constrained World: Part 1 of 2” and “Profiting from Physical Assets in a Resource-Constrained World – Rules and Picks (Part 2 of 2)” (click here for archives on related trades). I consider all dips buying opportunities for the long-term. However, the strategy is predicated on a major slowdown (or crash?) in China creating a historic buying opportunity (I think the last “bargains” for generations to come). Until then, I sell most of my commodity plays on rallies. Gold and silver are in a special category – I most interested in these precious metals as long as world’s central banks are papering over economic problems with increasing amounts of currency.

Insider buying
Insiders do not always buy with good timing, but they almost always buy because they think the stock will “eventually” go higher. I look out for insider buys in stocks that are particularly unloved and beaten up. I will buy aggressively during oversold periods and “nibble” during overbought periods. My last post on insider plays was “The Market Is Ignoring These Insider Purchases, But You Should Not.”

I hope that clarifies my cross-current of trading strategies. I realize at certain times they may conflict; technical signals may conflict and force hard choices. In 2012, the chance for conflict will be high as I get much more wary about an extended sell-off. No matter what happens, note well that I am neither a permabear nor a permabull. I prefer to trade in bull markets, I do not relish economic calamity but will trade as bearishly as the times require, and, through it all, I am optimistic about the future.

Weekly T2108

*All charts created using freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long SDS, long puts and calls on VXX, short EUR/USD, long GLD, SLV