, , , ,

Bonds-the fourth quarter trade of 2014

If you have been paying close attention to the stock market, market internals/breadth, and bonds for the past three months, you’ve likely come to the same conclusion that I have.

The US stock market is showing signs of severe weakness with the market breadth and leading indicators pointing to a sharp correction for stock prices.

With fewer stocks trading above their 50 and 200 day moving averages each week, while the broad market S&P 500 index continues to rising, this bearish divergence is a red flag for long term investors.

When a handful of large-cap stocks are the only things propelling the stock market higher while the majority of small-cap stocks are falling you should keep new position sizes smaller than normal and start moving your protective stops up to lock in gains/reduce losses in case the market rolls over sooner than later.

Small cap stocks are typically a leading indicator of the broad market. The Russell 2000 index is what investors should keep a close eye on because it’s the index of small-cap stocks. Since March of this year, the Russell 2000 been trading sideways and actually making new lows. This tells us that big-money speculative traders are rotating out of the stock market and into other investments like high dividend paying stocks, blue chips, and likely bonds.

Looking at the chart below I have overlaid the S&P 500 index and the price of bonds. History has a way of repeating itself; although it may never feel the same and the economy may be different, price action of investments have the tendency to repeat.

In 2011 we saw the stock market and bonds form specific patterns. These patterns clearly show that money was rotating out of the stock market and into bonds. During times of uncertainty in the stocks market money has the tendency to move into bonds, as they are known as a safe haven. Bonds tend to reverse before the stock market does, so if you have never tracked the price chart of bonds before, then you should start.

SPXvsBONDS

From late 2013 until now bonds and the stock market have repeated the same price patterns from 2011. If history is going to repeat itself, which the technical and statistical analysis is also favoring, we should see the stock market correct 18% to 30% in the near future. If this happens bonds will rally to new highs.

It’s important to realize the chart above is weekly. Each candle represents five trading days, and four candles represents one month. So while this chart points to an imminent selloff from a visual standpoint, keep in mind this could take 2 to 3 months to unfold or longer. The market always has a way of dragging things out. If the market can’t shake you out, it will wait you out.

So if you are short the market or planning to short the market be very cautious as it could be choppy for the next several weeks and possibly months before price truly breaks down and we see price freefall.

To get my pre-market video analysis each day, and trade alerts visit: www.TheGoldAndOilGuy.com

Chris Vermeulen

, ,

How Much Will a 15% Hair Cut Cost Your ETF Portfolio?

Over the past few weeks I have been watching the DOW and Transportation index closely because it looks and feels like the Dow Theory may play out this year and the stock market could take a 15% haircut.

But what if you skipped on the haircut and opted for a 40% refund?  What? Keep reading to find out how.

Keeping this post short and sweet, I think the US stock market is setting up for a sharp selloff. And it will look a lot like the July 2011 correction. If my calculations are correct this will happen in the next 3-9 weeks and we will see a 15% drop from our current levels. Only time will tell, but I have a way to hedge against this with very little downside risk to you ETF portfolio.

 

The Dow Theory Live Example for ETF Portfolio

The daily chart of the SP500 index below shows our current trend analysis with green bars signaling an uptrend, orange being neutral, and red signaling bearish price action. Currently the bars are green and we can expect prices to have an upward bias.

The Dow Theory could be  in play. When both the Transports (IYT) and the Dow Jones Industrial Average (DIA) cannot make higher highs and start making lower lows, according to the Dow Theory the broad stock market is topping.

We are watching the market closely because they have both made lower highs and lows.  This rally could stall in the next couple weeks and if so we expect a 15% correction.

 

Model ETF Portfolio

 

Take a look at the 2011 Stock Market Crash

Model ETF Portfolio Trading

The chart above shows how fearful traders have a delayed reaction to moving money from stocks to a mix of risk-off assets.

The choppy market condition during August and September clearly helped in frustrating investors and created more uncertainty. This helped prices of this ETF portfolio fund rally long after the initial selloff took place. This is something I feel will take place again in the near future and subscribers of my ETF newsletter will benefit from this move.

Because we have a Dow Theory setup, our risk levels are clearly defined as to when to exit the trade if it does not play out in our favor. But with the potential to make 40% and the downside risk only being 4%, it’s the perfect setup for a large portion of our ETF portfolio. And just so you know this is not a precious metals trade as we are already long that sector and up 10% in that position already.

Get My Daily Video Forecasts & ETF Trades Today – Get Off The Fence Make Your ETF Portfolio Perform

Chris Vermeulen
www.TheGoldAndOilGuy.com