Market Watch

Buying Power Weak, Reducing Equity Slightly

Download PDF version – Market Watch – BUYING POWER WEAK, REDUCING EQUITY SLIGHTLY – Dec 31, 2020

 

“You can’t really know where you are going until you know where you have been.”
– Maya Angelou

 

Many people will enter 2021 worried about 2020 but that’s like trying to drive down the road backwards using only your rearview mirrors. In only looking back we fall victim to extrapolating the past into an unknown and ever changing present and future. You may be fine for a while but eventually you’re going to go off the road because of something you don’t see coming.

Trend following involves looking back but using that lookback to systematically quantify your odds going forward; about buying the best, not the rest and to enjoying the profit potential that comes with doing that!

We look forward to 2021, will do our best in everything from reporting, to portfolio management to business management and will keep you posted every step of the way.

Best regards for health, wealth and a fabulous New Year, together!

 

What is Money Flow? A look at our risk monitoring tools

Money flow is calculated by averaging the high, low and closing prices, and multiplying by the daily volume. Comparing that result with the number for the previous day tells investors whether money flow was positive or negative for the current day. Positive money flow indicates that prices are likely to move higher, while negative money flow suggests prices are about to fall. Money flow, then, effectively measures investor enthusiasm and is the basis for our Buying Power Model.

Buying Power Model Today
January/February 2016 was a major bottom in the stock market and the Buying Power Model was recording significant positive divergence between Money Flow and Price. We had 17% of stocks in the S&P500 with price greater than the 200 day moving average but 56% of stocks in the S&P500 with Money Flow greater than the 200 day moving average, a major positive spread of 39%.

Buying Power Model
Then there was what happened this year near the bottom of the COVID Crash of March and we had 5% of stocks greater than the 200 day moving average and 54% with Money Flows greater than 200 day moving average, another major positive spread of 49%.

The positive divergences lead to significant rallies, and right now we are recording the opposite spread. Money Flows are currently showing that liquidity has been contracting.

Under these conditions we closely monitor our Primary Trend Indicator for deterioration in trend signals.

Primary Trend Indicator (PTI)
Below we are displaying a few of the shorter-term components of our PTI as they will signal sooner than the longer-term components and can give us a ‘heads up’ as to what may come next. We can see a few things to watch.

After a surge in the fall, the number of stocks hitting new highs in the S&P500 is again trailing off and under the 10% threshold that we want to see to confirm uptrends.

During the September and October market corrections volume on rising stocks decreased as the corrections unfolded. This seems obvious. However, today we are seeing the same effect while the market has not yet begun to correct.

We are also seeing a slow, but continued deterioration in the number of stocks above their own 20 day moving averages, again diverging negatively from the market at these levels.

 

 

Conclusion

The PTI component items mentioned above are short term observations and not intended to suggest the market is doomed. However, when coupled with measurable readings of complacency among market participants and weakness in our Buying Power Model, it causes us to tighten our stops, and hold cash on any positions that get sold until these divergences recede.

We remain completely open to any eventuality that the markets bring. Our strategies, tactics and tools will help us to successfully navigate whatever happens as we focus on monitoring supply and demand signals that the market provides us.

I hope you have a very good weekend. If you have any questions about this update, or anything else please do not hesitate to reach out.

 

Peter Schenk, CMT, CIM | Portfolio Manager

 

Words we operate by:

“Deliver to the world what you would buy if you were on the other end. There is huge pleasure in life to be obtained from getting deserved trust. The way to get it is to deliver what you would want to see if you were on the other end.”
-Charlie Munger

“Strive not to be a success, but rather to be of value.”
-Albert Einstein

 

 

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