The market seems ripe for a relief rally this week, whether the Fed finally initiates its long anticipated rate-hike cycle or kicks the can due to uncertainty over a softening global economy and Chinese currency manipulation . But a quick glance at the Chaikin Analytics derived market conditions offers key clues as to whether any rally would signify a more meaningful resumption of the bull trend. In my view, any rally is just smoke for the dramatic entrance of The Whipsaws at Vol-A-Palooza 2015.
First, let's rewind a year. The market and the underlying Chaikin metrics were portending good back half to 2015. A stock's Power Gauge is a forward looking ( 3-6 months) divining rod for price performance. In aggregate, lots a lots of bullish Power Gauges mean good things for underlying index. Sure enough....
First, let's rewind a year. The market and the underlying Chaikin metrics were portending good back half to 2015. A stock's Power Gauge is a forward looking ( 3-6 months) divining rod for price performance. In aggregate, lots a lots of bullish Power Gauges mean good things for underlying index. Sure enough....
we rallied into the end of year.
For today's market conditions, a sea of red has washed away our once green pastures. The past week has marked lowest Power Gauge ratio readings in the 3 years we've been recording them and all of our key technical metrics are bearish.
For today's market conditions, a sea of red has washed away our once green pastures. The past week has marked lowest Power Gauge ratio readings in the 3 years we've been recording them and all of our key technical metrics are bearish.
We expect volatility to increase leading up to Thursday's Fed rate decision, followed by a strong post announcement knee jerk reaction and perhaps an even stronger and more sustained counter move. Not investable, but likely tradable.
Once the Fed interest rate news cycle has passed, we expect politically motivated threats of government shutdowns and debt ceiling stagnation to inject a new level of fear into the markets. And on quiet days here in the US, Chinese currency devaluations and that country's ad hoc approach to financial and economic crisis management will be there to pump up the $VIX.
So what's the game plan?
Once the Fed interest rate news cycle has passed, we expect politically motivated threats of government shutdowns and debt ceiling stagnation to inject a new level of fear into the markets. And on quiet days here in the US, Chinese currency devaluations and that country's ad hoc approach to financial and economic crisis management will be there to pump up the $VIX.
So what's the game plan?
- Sell rallies and raise cash with Bear Call option spreads on downtrending Bearish rated stocks in weak industry groups. We'll use Overbought Sell, Money Flow Sell and Relative Strength Sell and Breakdown signals on highly liquid stocks and ETF's.
- We'll very selectively acquire uptrending, Very Bullish stocks in strong sectors and industry groups at half our normal position size. Money flow must have a preponderance of green in addition to all our regular, strict rules. Dividend paying stocks, particularly large caps with Very Bullish ratings and a history of raising dividend streams can be a safe pool to fish from.
- Favor ETF's, which diversify against single company risk, but only the most liquid products, such as SPDR Sector ETF's.
- With earnings and volatility risks heightend, we'll sell premium (options) on long holdings whenever possible For example, covered calls or cash secured naked puts.
- Be prepared when information changes. If the Fed surprises with easing, for example, we'll have a shopping list of "Risk On" stocks ready to deploy in case of a market melt up.
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