Fasten your seat belt!

Friday, August 21, 2015
By Paul Martin

Puru Saxena
Friday, 21 August 2015

It is official; the multi-month trading range on Wall Street has now ended with a breakout to the downside. You will recall that the major US indices were in a quiet, consolidation phase since December and over the past several weeks, we wrote extensively about the deterioration in the stock market’s internals.

In fact, about a month ago, our proprietary set of trend following indicators flashed ‘market under distribution’ which prompted us to reduce our equity exposure and partially hedge our book. Unfortunately, over the past few trading sessions, these set of indicators have deteriorated even more and there is now a high probability of an autumn plunge. Accordingly, we have reduced our equity exposure even more and currently, only half of the capital under our management is invested in common stocks.

Our remaining ‘long’ positions in equities are on a very tight leash (protected by trailing stops) and if the stock market slides further and our stops are hit, our losses will be no more than 3%. On the other side of the ledger, in order to hedge our equity exposure, we have allocated 20% of our managed capital to 20-30 Year US Treasuries, 10% to 25+Year Zero Coupon US Treasuries, 5% – ‘short’ industrials, 5% – ‘short’ biotechnology and 5% – ‘long’ US Dollar. So, if the stock market declines, our small losses on our remaining ‘long’ equity positions will probably be mitigated by profits from these holdings and if things get really ugly, we will do quite well.

Look. The stock market’s internals look very weak and after peaking in April, the NYSE Advance/Decline Line has now fallen to a multi-month low. Moreover, the number of 52-week NYSE lows is staying stubbornly above the number of 52-week NYSE highs and volume is rising on down days. Last but not least, all the major US indices are now trading under the 200-day moving average and both the Dow Jones Industrial Average and the S&P500 Index have slipped to a multi-month low. Despite this awful price action, many analysts and commentators remain oblivious to the looming danger and they are urging their followers to ‘buy the dips’!

Make no mistake, to our experienced eye, this does not feel like a normal pullback within the context of an ongoing primary uptrend. Instead, it seems to us as though the major US indices and global equities are rolling over and even our primary trend filter is getting close to flashing a full blown ‘market in correction’ signal. So, our readers should remain on guard and consider liquidating all weak stocks from their investment portfolios. Furthermore, we suggest that our readers cut back on risk and consider hedging their stock holdings.

The Rest…HERE

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