(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: 86% (overbought day #21)
VIX Status: 18.6
General (Short-term) Trading Call: Close more bullish positions. Begin but do NOT expand an existing bearish position.
Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
Commentary
I was surprised that T2108 did not tip 90% on today’s beginning-of the-month rally. Then again, the S&P 500 index did not make a new year-to-date high. Buying volume was a little stronger than usual, so it is definitely possible bulls are trying to stampede their way through the overhead resistance at 2011’s highs – May’s 3-year high is now 2.9% away.
Two days ago, I listed the beginning-of-the-month rally as one of the trades to keep you occupied during the extended overbought period. After feeling lucky to profit nicely from the “Tuesday trade,” I chose not to further press my luck. I hope YOU did!
Today was a new day. I chose to add one more speculative trade based on a pattern I noticed in post-earnings trading in Amazon.com (AMZN). I created a trading strategy to take advantage of this pattern: buy the stock at the open and hold for at least two weeks unless the position closes below the lows of the first post-earnings day. Thanks to this trade, and its success so far, I am now up to my ears in speculative longs that run uncomfortably counter to the bearish T2108 portfolio.
It is increasingly likely that the T2108 portfolio will end this cycle with a loss. Of 16 overbought periods since 1986 that have lasted longer than 20 days, only ONE overbought period ended with an overall loss. (I have not yet analyzed the data on the extent of selling AFTER the overbought period ends). The maximum return of this overbought period, 5.5%, is already at the very extreme of the distribution of returns relative to duration of the overbought period. (See my analysis of overbought periods for more details). All this means that T2108 is right at a very important tipping point. Either the S&P 500 tops out right here, or bulls stampede this bad boy right into the 3+ year highs. For this reason, I have changed the trading call for traders with existing bearish positions: this is NOT the time to further expand these bearish bets. I will only reconsider expanding if the S&P 500 reaches about a 10% return for the overbought period.
The biggest irony for this period is that the market’s behavior is EXACTLY what I projected after the market bounced out of oversold conditions at the August lows and especially after the October lows. The S&P 500’s distinct failure at the 200DMA resistance in late October altered my overall outlook to a bearish one. There is an important lesson here that I am still trying to figure out…
Buckle up!
Charts below are the latest snapshots of T2108 (and the S&P 500)
Refresh browser if the charts are the same as the last T2108 update.
Daily T2108 vs the S&P 500
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
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 and VXX; long AMZN calls and shares