Mid-week market update: The usually reliable S&P 500 Intermediate Term Breadth Momentum Oscilator (ITBM) flashed a buy signal in the third week of June when its 14-day RSI recycled from oversold to neutral. The S&P 500 consolidated sideways for about a week and resumed it climb. This is the story of why I did not act on the buy signal and the lessons learned.
A frothy market
At the time, I was concerned about the stretched nature of market breadth and the signs of froth in sentiment readings. At the time, the put/call ratio had issued a cautionary signal, which was the sign of a tactical top. Even though the put/call ratio has backed off from a crowded long extreme, sentiment readings are still stretched.
I was also corresponding with a reader about the excessively high level of over 100 for the NAAIM Index, which measures the sentiment of RIAs who manage individual investor funds. Here is the full history of the NAAIM Index. Readings of over 100 have often marked a tactical top, but it can be a bit of a hit and miss as a trading signal. While you would have usually realized profits if you had shorted whenever NAAIM exceeded 100, you would also have experienced significant drawdowns in some instances.
There was also the continuing breadth divergence shown by the market, as documented by SentimenTrader.
Strong momentum
That’s the short of trading environment investors face today. Valuation and breadth are stretched, but price momentum is strong and positive. The S&P 500 made another all-time high while going on an upper Bollinger Band ride. In the past, breaks from upper BB rides have resolved in several days of sideways consolidation before stock prices break, either up or down.
While relative breadth, as measured by the strength of megacap leadership to the broad market, is weak, absolute breadth is behaving reasonably well. Net NYSE 52-week highs-lows is still positive, which is a constructive sign for risk appetite.
Market catalysts
Looking to the days and weeks ahead, investors can look forward to the U.S. CPI report tomorrow (Thursday) morning, followed by the PPI report Friday. Once the CPI and PPI are out, the market should have a fairly accurate estimate of PCE, which will be a key reading for Fed officials as they convene their July 31 FOMC meeting. Fed Chair Powell struck a more balanced tone in his Capitol Hill testimony this week as he characterized risks as more balanced between growth and inflation. The Street interpreted his remarks as dovish, but it remains to be seen whether he can convince the hawks on FOMC to cut rates by the September FOMC meeting, which is now the overwhelming market consensus.
Here is JPMorgan’s estimate of the market reaction function to core CPI. The Street is mostly expecting a soft CPI to fuel a greater risk-on reaction.
In addition, earnings season is kicking off and anything can happen.
My inner trader decided to override the ITBM buy signal as he was concerned about the elevated levels of risk. He missed the buy signal, and it’s too late to be buying now. Even though the trade worked out, he would have done the same thing all over again for risk control reasons.
Your own mileage will vary.
3 thoughts on “How I missed a trade (and what I would do)”
Nobody ever went broke by not taking on a trade.
When in doubt, sit it out. There will always be another trade setup.
Hard to do.
The newest factor is overriding others and that is the fallout from the debate. Biden’s performance was so shocking that Trump is now a clear favorite.
Markets are adjusting to his stated policies. Overall, he is corporate America VERY supportive which should boost the stock market generally with a few buts.
I’ve rebase my 120 sector ETFs to debate day and am watching them unfold afterwards.
Policy one, major deregulation – financials are outperforming.
Huge import duties with accompanying higher inflation and interest rates and lower dollar = Consumer Discretionary is weak (inflated prices) /autos protected by tariffs would be protected are are strong/Home Builders are weak due to higher mortgage rates/small caps underperforming due to higher rates dragging results/yield curve going positive with long rates higher on worries about government finances.
Energy stocks weaker as Drill Baby Drill will lower crude prices.
Big cap tech strong as A.I. will be unregulated
I am see ALL of these narratives playing out in relative stock, currency and bond movements.
We are all so used to watching the week to week economic reports for trading ideas that we are missing the epic overriding nature on economics
and society of a Trump election with a sweep likely of the other houses. Sectors are aligning themselves accordingly now. Much of it is capitalist market friendly early on but one must worry longer term about high deficits with lower tax rates causing an epic mathematical problem of government debt.
This year I have traded many indexes far to many to mention. I am up significantly for the year but I would have been better off with a buy and hold strategy – TQQQ 68% and SOXL 120% ytd. Trading does not work all the time. The difficult;y is to decide when to buy and hold and when to trade.
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Nobody ever went broke by not taking on a trade.
When in doubt, sit it out. There will always be another trade setup.
Hard to do.
The newest factor is overriding others and that is the fallout from the debate. Biden’s performance was so shocking that Trump is now a clear favorite.
Markets are adjusting to his stated policies. Overall, he is corporate America VERY supportive which should boost the stock market generally with a few buts.
I’ve rebase my 120 sector ETFs to debate day and am watching them unfold afterwards.
Policy one, major deregulation – financials are outperforming.
Huge import duties with accompanying higher inflation and interest rates and lower dollar = Consumer Discretionary is weak (inflated prices) /autos protected by tariffs would be protected are are strong/Home Builders are weak due to higher mortgage rates/small caps underperforming due to higher rates dragging results/yield curve going positive with long rates higher on worries about government finances.
Energy stocks weaker as Drill Baby Drill will lower crude prices.
Big cap tech strong as A.I. will be unregulated
I am see ALL of these narratives playing out in relative stock, currency and bond movements.
We are all so used to watching the week to week economic reports for trading ideas that we are missing the epic overriding nature on economics
and society of a Trump election with a sweep likely of the other houses. Sectors are aligning themselves accordingly now. Much of it is capitalist market friendly early on but one must worry longer term about high deficits with lower tax rates causing an epic mathematical problem of government debt.
This year I have traded many indexes far to many to mention. I am up significantly for the year but I would have been better off with a buy and hold strategy – TQQQ 68% and SOXL 120% ytd. Trading does not work all the time. The difficult;y is to decide when to buy and hold and when to trade.