Protect Your Portfolio 20190728

Market Timing Service
Hello everyone. It's Stephen Whiteside here from with this week's edition of Protect Your Portfolio. In this weekly presentation, we take a longer term look at the North American markets using weekly charts. We use weekly charts to help filter out all of that market noise from Monday to Friday, so we're left with just one decision point, and that of course is the closing price from 4:00 PM Friday afternoon.

Starting off with the VIX, the VIX was down nearly 16%. That, of course, is supportive for higher stock prices. A little divergence though, you're going to see the SPY, SPDR S&P 500 ETF and the QQQ, Nasdaq 100 ETF making new highs. You'd think the VIX would be making new lows; that's not the case at the moment. This coming Friday, if we close above $16.38, alarm bells would go off and we'd be quite concerned about the health of the stock market. We're seeing the S&P 500 make a new high. The NASDAQ-100 make a new high, no new early warning signals for the major US indices that we follow. There are some sectors that are seeing new early warning signals, but not the major indexes themselves.

So whether we're looking at a XLP, SPDR Consumer Staples, or the XLV, SPDR Health Care ETF, we're looking at XHB, SPDR Homebuilders, XLI, SPDR Industrials, XLB, SPDR Materials ETF, or looking at the XLU, SPDR Utilities sector. We have new early warning signals for all of those. Certainly no reason to get overly Bearish, but this is the time and place, you should be locking in profits in these sectors and looking for a possible exit strategy for the not so distant future.

What really worked last week were XSD, SPDR Semiconductor ETF, which were up just under 5% on the week, making a new high for this move for the chip sector.


Looking north of the border, not a lot of action in the Canadian market S&P/TSX Composite index (^GSPTSE). We were up on the week just by 45 points, a quarter of a percent. We are projecting higher prices here, but not seeing higher prices. Still having trouble breaking out above the previous highs. Our next target to the upside is 16,875 and then 17,500 but if you look and see what the pros are doing right now, I don't think we're going to get there anytime soon. The pros haven't given up control yet. They are just stop buying up here. They don't want to pay higher prices for anything, and so that is putting a top to the Canadian market at the moment.

We are looking at some new early warning signals. We have an early warning signal for S&P/TSX Canadian MidCap (SPTSEM) and for the S&P/TSX Global Mining Index (TXGM.TS) sector. Energy stocks S&P/TSX Capped Energy Index (^SPTTEN) continued to move lower, unfortunately, while S&P/TSX Global Gold Index (^SPTTGD) did have a pullback on the week, but did not take out the previous weeks low. So we're down 1.44%, so just under 1.5% on the week. Of course, if you see something that's poking through the top of the Panic Zones and we've got ranked a 10, that is the time and place where you have to look at taking money off the table and be a lot more concerned about selling than buying. Anytime you're poking your head through the top of the Panic Zones, we call that "panic buying" and that is certainly when you want to look for an exit strategy.


Warning Season

Now, whether you're concerned about some of the negative emails you've been getting lately or if you're just getting prepared for the September, October timeframe, which are historically very volatile times for the market. Let's go back in history and take a look at what happened around this time in 1987. Now, oddly enough, if you go back to 1987, you go to Google and you ask Google a simple question, "What day did the market peak in 1987," or ask it another way, "When did the market peak in 1987," it forces you to look at the day that it crashed, not the day that it peaked. And if we're going to Protect Your Portfolio, we don't care when it crashed, we care when it started, not when it ended. And so, we need to take a look at when did that market peak and what happened after, before it crashed.

Now, I'll break this up into two parts, just a couple of daily charts and then we'll go to the weekly charts. But, on the daily charts, back in '87, as soon as I think of '87, I think of moon cycles. They were very important to me back then because I had most of my money in commodities, and anything around a moon cycle was an important event to me at that time. If you ever investigate trading commodities, moon cycles are going to come up quite a bit. And so the stock market peaked around a new moon in late August of 1987, and it bottomed in October, a day before a new moon. And then it bottomed once again on a full moon in early December. So just a couple of the moon cycles that happened back then, but they're certainly, they're as fresh in my mind today as they were back at that time.

Now, moving from daily moon cycle charts to weekly charts. I thought we'd walk through the seven weekly charts we have in our portfolio and look and see what signals we could have got back in 1987 that would have kept us from suffering through the crash of 1987. So, of course, we're starting off with the panic zone chart, and at that time we were punching through the top of the Panic Zones, currently ranked at 10. Now, on that particular week, you can see we were projecting the market to roll over over the next few months, but certainly not projecting a crash. On that particular week, we closed down over two and a half percent, but didn't close below the previous week's low.

So, from a volatility point of view, we were pretty similar to the previous weeks, so no alarm bells set off just yet. And you can see, projecting down, you can see the little dots here down to 2,300, these down to 2,200, which would have been the lows from 1987. And then down here, an extreme move down would have taken us down under 2,000 where we ultimately ended up. That 2,000 level, that was the peaks of 1986. We had to go through the lows of 1986 before we started to find buyers again.


So, if we move on and look at what happened the rest of the year, now the first thing you're going to want to notice is an early warning signal showed up right after the market peaked. Now, the market didn't roll over until a month or so later, but we had the early warning signal in there. So, certainly a reason to be concerned about the market going down as opposed to going up at that time. And you can see we punched through the bottom of the Panic Zones, pressure zone formed and that was when the low risk buying opportunity showed up for the market.

If we look at the weekly right-side chart, again, we're looking at the last week of August of 1987. At that time, looking down at the lower channel line, we were looking for a close below 2,476.54, we'll use that number in a couple of minutes. Once again, you can see early warning signal went off down here, but that certainly could fade away if we don't head lower from that point.

Now, looking at what happened for the rest of the year, you can see that that early warning signal was locked in. You can see we had a momentum shift, but the market actually recovered after the momentum shift. And if we blow that up, you can see back here, this is where the market peaked, it didn't close below the previous week's low. We did that on the next week, and then we came down and traded below the lower channel line, but did not close there. There's the momentum shift, but right after that happened, the market actually closed up two weeks in a row, and then finally, and that was on October 9th, 1987, that Friday we closed below the lower channel line, giving us our sell signal. And then you had the opportunity to sell at the open on the next Monday and after the market opened, it actually traded higher on that day before we started to fall apart.

Looking at a Who's In Control, you can see, and I'm always talking about these, those Bearish Reversal signals and those Bullish Reversal signals. And so, in the last week of August of 1987, we did have a Bearish Reversal signal. And so, we would have been talking about that at that time and that would have been a concern to see if the market headed lower from there. And across the bottom, who's in control? You can see the pros had quite a big divergence. I mean, the pros peaked back here in early 1987 and the market continued to move higher, but the pros had a divergence. While the market was going higher, we didn't see a higher high in the pros, and that is known as a Bearish divergence. That would have been area of concern. And then of course the market collapsed from that point on.

Next, looking at our price targets, we are trying to get up to 2,812.50, that was the top of our projected trading range at that time. We would have taken until 1990 before we actually got up to that level and traded through it. But, if you look at this chart, and it's important to know that when this chart was made based on the data from the last week of August, 1987, the lower channel line was down at 2,476.54, so below the 2,500 level. Now, I'm always telling you to look two lines up and two lines down. We didn't get the sell signal until below 2,500. So, two lines down from that point takes us down to the lows of 1987, down at the 2,187.50 level. That would have been a reasonable move to the downside.

Now, what happened? Well, the first leg down of the crash took us down to that level and we found support. Then we broke through that once again and had a wild week in which we took out the 1,875 level and in fact traded all the way through the lows of 1986, and so on that particular week, which was the crash week, you've got to imagine the Fed came in and spent some money in the stock market to pull it back up. But after that point, the 17, 1,875 level became important. And then also resistance up here at the 2,031.25 level was also an important area of resistance.

Looking at the Mid-Term chart, of course this is a more conservative look at the market for traders with a longer term view, investors with a longer term view. And of course the buy signal came in the middle of 1984, and they had nothing to be overly concerned about. Even though we had a bunch of early warning signals, really didn't get down and test the tether line at all during this period. We did have a bearish divergence. The momentum indicator at the bottom here peaked in 1986, and in '87 it actually had a lower high and then started to move off, and until the crash we had another rollover here where we had another lower high.

So, when the indicators aren't keeping up with how fast the market is moving, that's a bearish signal. It can also be true on the other side; if the indicators aren't making new lows but the market is, that could be a bullish divergence. And so, that's how things look for the Mid-Term chart.

And then looking at our projections here, we were projecting up over 3,000 at the end of August. Of course, a projection doesn't know what it doesn't know, and so we are looking for higher prices at that time. Looking down, of course, you've got the major moving averages. And remember, this is a weekly chart, so it's the 50 week, the 100 week and the 200 week. When the market eventually broke, it found support down at the 200 week moving average. It certainly traded through that, then came back and found support. And then of course, the 100 week moving average turned out to be resistance on the way back up.

And our last chart, of course, is the Fly Paper channel chart. And in this particular situation, just like every other time, anytime that you're way up here, you expect a major pullback to take you down into the channel. And of course, if it's still a bull market, people will buy the dip. If it's not a bull market, they'll sell the rips. And what do you know? Our first step down took us down to the top of the Fly Paper channel. But, unfortunately, we cruised right through that.

And then, what was supposed to be support ended up being resistance on the way back up. And that's what you normally look for. But you know, this is 1987; it happened very quickly and we drove right through that Fly Paper channel and became oversold and unwanted for quite a while before the market was able to pick itself back up and moved back up over the Fly Paper channel.
Okay, folks, that's a little look back in history, but back in 1987 we had the early warning signal on the panic zone chart. We had the bearish reversal signal on the smart money chart, and then finally, we had the sell signal in early October on the weekly right-side chart, and that would've got you out of the market before the crash. It also would've got you mentally prepared to get out of the market before the market crashed. And so, that's what we're looking for this summer. We're looking for early warning signals before the market falls apart. And this week, we don't have them for the major indices.

Have a great day, have a great week. Next time you'll hear my voice is on Tuesday morning, and at that time we'll take a look, a closer look, at the US stock market.


Stephen Whiteside