FYI right now we are in a weekly uptrend, but positioned for what could very well be a strong monthly downtrend. The QQQ, SPY and Dow are now overbought on a weekly chart and the Russel is not far behind. Also a higher high is made in the RSI while stocks are showing a lower high.
Conclusion:Position size in stocks should be minimal and reduced further into a weekly overbought signal in the remaining indices. It should be concentrated in value names as well.
The US$ is in weekly neutral position as trend is mixed on a weekly chart showing a downtrend in the parabolic SAR and the last signal from overbought in slow stochastics, but momentum gaining positive movement. However it is in a position for a strong monthly uptrend with oversold Slow Stochastics starting to near the trigger buy, but the Parabolic SAR is bullish and a bullish momentum signal in the MACD Histrogram has recently been given.
Conclusion:In light of weak market and strong monthly uptrend, Position size should be large, and leverage (such as using UUPT) is permitted) . The position size should be large enough to be biased towards a market decline and rise in the dollar, but small enough to get more aggressive should the weekly trend change upwards.
Treasury bonds (TLT) are in a Monthly Uptrend but OVERBOUGHT, and in a weekly downtrend just coming off of week 2 of transitioning out of the previous overbought signal.
Conclusion:Position should be unleveraged (avoid UBT, TMF) and a smaller position size should be taken in spite of the likely decline in stocks and the possibility to get significantly more overbought.
DBA – Although similar to stocks, DBA is in a monthly downtrend and what appears to be a weekly uptrend, the weekly uptrend has only just begun. However the weekly results are still mixed. With that being said, it’s rare to see an oversold RSI but the RSI came very close to oversold recently on a weekly chart, and the slow stochastics transformed from oversold and turned upward giving us a bullish signal, and the MACD is very close to a bullish signal. As a result I believe the chart could be considered bullish in spite of the still bearish parabolic SAR.
Conclusion:I feel DBA is a much better option for “risk on” at this point than stocks and possibly gold and should be positioned as such.
DBC – Very similar to DBA, but the parabolic SAR and MACD histogram on a weekly chart as well as slow stochastics are all bullish. Monthly is bearish. There is a bit less room on the upside before it gets overbought however.
Gold is in a monthly Overbought uptrend although a weekly uptrend signal is close to and expected to trigger into bullish territory. Silver is showing a monthly downtrend with a mixed weekly chart.
Conclusion:Gold is likely due for a pause longer term, but still remains a potential option to help reduce correlation in the market and a very small position is still warranted. Silver also gives us a clue about gold and silver is a bit bearish right now on the monthly chart.
Copper is bearish but has been for quite some time and is close to getting oversold on a monthly basis, for now stay away but keep an eye on it if we are to see further declines
Natural gas is at this point starting to look like an excellent value and contrarian play, so I would consider a position in that, as it is heavily oversold, however I would keep the position small and not add a significant position until it transfers out of oversold and gives a bullish signal as it is still in a downtrend, although one that has gone on for years and isn’t likely to continue for much longer.
It certainly may be possible to find undervalued stocks still worth it but the question is what is your time frame?
Overall Conclusion: The general theme is “protect capital” at this point. Stock position should be reduced, and potentially reduced to the minimum when overbought signals hit on weekly chart. Positions in DBC and DBA and potentially even GLD can be used now so that in the event that stocks get overbought it will provide a seemless transition into reducing stocks while still maintaining minimum allocation for “risk on” plays and avoiding overbought areas with minimal room for upside.
Meanwhile, US dollar position should be large and potentially increased near maximum if either a weekly oversold signal is given or weekly uptrend occurs. Treasuries should have a very small position but are still an option especially with the markets vulnerable and likely the US treasury bonds can gain. Shorting the euro is a possibility as well via EUO.
A small position could be considered in arbitrage plays, but it either should be kept small or larger with a majority (except for a small amount) held in an play that is expected to close very soon. Leverage as well should likely be taken off now, or very soon. A small position will always be warrented in arbitrage because of the ability to reduce correlation, however if e get overbought on a weekly basis and remain in a downtrend on a monthly chart, that is a vulnerable state of the market which could potentially cause deals to fall apart either through some kind of a weasel clause, or financing falling through, so unless you are very meticulous and good in this area, it is wise to keep the size smaller for now.
Although Arbitrage plays have very little correlation, so there always is room if the deal is right. But correlation and risk still exists in the form of economic contraction in lending, and increased pessimism by both businesses and individuals. Leverage should certainly not be used at this time. You can also specialize in pair trades, pre and post earnings plays, and other relatively uncorrelated things with the market
A very small (such as a 2%) position size could be considered in natural gas at this point via UNG
risk off:60% (leverage permitted)
spy or value stocks: 10%
When we get the overbought signal on a weekly basis (including the russel), it makes sense to get more “aggressively conservative”:
risk on:20% (shorts considered)
risk off:75% (leverage permitted)
More specifically it may look something like:
2% GLD (copper?)
You can also use valuation models to determine percentages and adjust based on these so you increase allocation as it gets more undervalued relative to the rest.
Since we are somewhere between the “no extremes” and the overbought position (not overbought in russel), you could be somewhere between the two.
Additionally a daily “bonus” allowed if OS/OB on daily basis if you prefer a more active approach. (Such as 10% increase in “risk on” and 10% decrease in “risk off” at OS) Generally I will rebalance after a daily chart swings to a high or low with a bias towards the opposite direction so I shift my allocation slightly.
TLT is much smaller than it would normally be in both cases, but there is a reason for this that I may address later.Comments »