Market Watch

A Caution Flag Waves, but Primary Uptrend is Intact

Download pdf Version – Market Watch – February 21, 2021 A Caution Flag Waves

 

“Good investment ideas are few and far between. Respecting the primary trend is a good investment idea.”
– Mark Ungewitter

 

Bottom Line:
Mr. Market’s health remains in great shape longer term, as breadth (participation) has clearly confirmed the recent breakouts. That being said, divergences continue to form, which suggest the uptrend may take a breathe.

The strength in copper has pushed it over $4 which it hasn’t seen in nearly 10 years. As other metals and commodities continue to show strength, either the global recovery will likely be much stronger than economists are expecting or inflation is winning the day.

 

In Our Portfolios
We are carrying higher levels of cash than normal as we’ve taken some profits in the face of some negative divergences which we cover below, as well as the fact that our Buying Power Indicator (BPI) is not matching the strength in our Primary Trend Indicator (PTI).

As the weight of the evidence remains positive in the long term, we will reset the portfolios by adding to existing strength in names like Novocure, Taiwan Semi-Conductor and others, as well as building new positions in other cyclical metals, energy and agricultural investments.

When you rebuild a fire, you don’t start with logs, we use smaller twigs, and those are the stocks that are now breaking out from solid bases. Soon we can add the bigger logs and get the rest of our money put to work as the fire reheats. The fact that market breadth remains strong, and the charts of the leading names in this market are not breaking down despite an orderly correction suggests that maybe there is more fuel for this fire.

 

More Fuel for the Fire
In recent days futures traders have cut exposure aggressively – even as the markets hold near the highs. The 2-week positioning change is the most negative in history – previously only seen at bottoms. Futures traders now hold a total of ZERO stock exposure.

 

 

Under The Hood
From the legend, William 0’Neil’s book, How To Make Money In Stocks

“Many investors like to think of, or at least describe, themselves as “long-term investors.” Their strategy is to stay fully invested through thick and thin. Most institutions do the same. But such an inflexible approach can have tragic results, particularly for individual investors. 

[You can be right about every indicator you watch] but if you’re wrong about the direction of the general market, and that direction is down, three out of four of your stocks will plummet along with the market averages, and you will lose money big time, as many people did in 2000 and again in 2008.

The best way for you to determine the direction of the market is to look carefully at, follow, interpret, and understand the daily charts of the three or four major general market averages and what their price and volume changes are doing on a day-do-day basis.”

“Why Is Skilled, Careful Market Observations So Important?

A Harvard professor once asked his students to do a special report on fish. His scholars went to the library, read books about fish, and then wrote their expositions. But after turning in their papers, the students were shocked when the professor tore them up and threw them in the wastebasket.

When they asked him what was wrong with the reports, the professor said, “If you want to learn anything about fish, sit in front of a fishbowl and look at fish.” He made his students sit and watch fish for hours. Then they rewrote their assignment solely on their observations of the objects themselves. 

Being a student of the market is like being a student in this professor’s class: if you want to learn about the market, you must observe and study the major indexes carefully. In doing so, you’ll come to recognize when the daily market averages are changing at key turning points – such as major market tops and bottoms.”

 

O’Neil wrote that after four or five days of definite distribution over any span of four or five weeks, it’s a sign that general market risk is elevating and the market will often turn down.

Distribution is a day when the market is down over .20% or greater, on higher volume than the preceding day.

Reviewing all the major US and Cdn averages, only one is showing some minor concern so it’s still too early for it to be considered a signal to sell.

The DOW, S&P500, New York Stock Exchange Index and the TSX Composite have shown almost no distribution days since the end of January.

Below we see a chart of the Nasdaq 100 (NDX). The dashed vertical red lines are days when the index was down over 0.20% on higher volume which happened four times in the last half of February. However, even the Nasdaq Composite which contains over 2,500 companies is mostly clear of any distribution, so the big names in the Nasdaq 100 are the ones in question.

 

The next chart shows a medium-term risk indicator (and a component of our PTI) which also brings up a warning flag on the NDX.

The chart shows the NDX in the top window and the percentage of Nasdaq 100 stocks above their 50-day simple moving average in the lower window.

The green lines show QQQ moving higher, while the blue dashed lines show participation narrowing in February 2020, early September 2020 and now. This indicator hit 90% in early January and has yet to exceed 75% here in February. Fewer stocks made it back above their 50-day SMAs and this shows some deterioration under the surface. Again, it’s too early to run for the hills, but it is on top of our risk watch list, as we watch to see if this deterioration simply reverses, or spills into other indices like the DOW and S&P500, and other longer term indicators.

 

 

Toronto Stock Index
Reviewing the TSX Index chart is interesting. After a few distribution days during the January market pullback, we’ve seen only one more in February as the commodity complex has bounced back which still weighs heavily in the TSX. Where it gets interesting is when you look at the distribution days that did occur all the way back through December and in the January pullback.

Below you can see that any selling that took place in the TSX index, stopped almost exactly at the solid blue line, which happens to be the highs set by the TSX in February 2020. If a further correction did ensue, that level would obviously be a very important level for buyers to step in. For the moment, the fact that somebody did end up buying there on each down day over the last three months is encouraging and is a big notch in the positive column for the primary up trend.

 

Measuring the Leaders
After we observe market breadth and the action in daily averages, another important indicator of a primary change in market direction is the way leading stocks are acting. After reviewing our Watch List charts this weekend, the verdict is that there is no real breakdown in market leaders. Many of the biggest, leading names like APPLE and TESLA, are still moving sideways and consolidating, but there has certainly not been a breakdown or downtrend just yet.

Below you see a chart of Apple holding above our entry point (red horizontal line) and above the important 65 Day Moving Average. Not perfect, but not trending down.

 

Apple Inc.

 

 

Here we see a chart of Tesla stock, while also pausing, TSLA is holding above the 50 Day Moving Average. A break of the red 65 Day average puts the dashed grey 100 DMA in play as important support. Its trend, along with the broader market will be determined day by day, but for now, the charts of AAPL, TSLA and stocks on our watch lists remain in uptrends.

 

Tesla Inc.

 

There are always issues to consider and we bring these to your attention only to share what we are watching and the evidence we are weighing. For the moment, that continues to weigh positive for the stock market.

 

CONCLUSION
Thank you for making it through this week’s update, which admittedly may be a bit dry. We just feel it is important to share with you what we are seeing.

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 had 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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