Last week we learned additional clues to help answer your question, “Do you see a correction, around the corner?” Today we will view a final chart to determine if the next pullback is just a correction or a signal the next bear market is starting!
Today, I will use one of the popular systems I have developed, highly effective at giving profitable trading (buy and sell) signals. Again, nothing is 100 percent accurate. Let’s take a look at a 20-year monthly chart of the S&P 500 and see if my system is giving sell signals, signaling a major correction ahead.
Per the chart, my trading sell signals are hit when two conditions occur. First, the price must cross down through the blue signal line and stay under this line by the end of the next month. If this happens, and the money flow indicator (bottom box) is signaling money flowing out of the market then we have a system sell signal. Many wished they would have been out of the market during these huge downturns (point A) from 2000-03 and also (point B) from 2007-09.
Quiz time. Are there current sell signals (point C) for the S&P 500? Per the chart you can see the price is trading well above the blue signal line and the money flow is still extremely positive so use the previous rules to determine the answer.
As stated last week, a pullback of 5 to 10 percent would be healthy for the market. Per the chart you can see a 5% pullback from the recent high would take the S&P 500 to 1722, well above my blue signal line at 1615. Speaking of the signal line, all investors should know how to determine a signal line for each and every security in their portfolio. Do you have a signal line for each of your securities? If not, why?
A final point. Per the previous market tops (points A & B), the previous topping action took several months to form. Currently, (point C) we have not had the same multi-month side wise action. Baring an exogenous event, (that I pray does not happen), as long as the Fed keeps pumping billions into the economy each month and as long as corporate profits do not fall off a cliff, after a healthy pullback, I see continued upside in the months to come. If we start to see multi-month action similar to points A & B, I would be extra cautious about additional long positions to your portfolio.
Next week we begin our year end portfolio analysis and see how the very popular managed mutual funds doing compared investing in the low cost, market indexes. Don’t miss it!
DAVID O. ENGLAND is an associate professor of finance at John A. Logan College and founder of the Eye on the Market-Training Academy. He can be reached at firstname.lastname@example.org. The information above is for educational purposes only and is not intended to be financial advice. Your decision to buy, sell, short, or hold any stock or investment product is a direct result of your own decision, free will, and research.
First Published in The Southern Illinoisan – December 8, 2013