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- Last Update: 17 February 2019, 17:11
I have marked the monthly MACD buy and sell signals on the S&P 500 index chart using green (for buys) and red (for sales) vertical dotted lines. For trading purposes investors should use the etf equivalent symbol SPY. I've backtested this for the past 25 years and it has kept an investor on the right side of the markets, insofar as the S&P 500 index is concerned. There are not a lot of signals but for long-term accounts like 401K's , burned in the big downturns , this is perhaps a 'good enough' timing tool to follow. I don't personally believe you should hold index funds when the MACD is on a monthly sell signal. As for individual stocks you will find that few will benefit you when the market is on a monthly MACD sell. Until the monthly MACD returns to a buy signal you should certainly put stops on any individual securities owned, in my opinion, to avoid losing hard to come by gains.
This monthly SP500 chart covers the period that includes the Great Financial crisis. I'm in process of analyzing what the returns have been taking the monthly MACD signals, versus what simple buy and hold would have accomplished. It will be interesting to see what it reveals. I am expecting that buy and hold from the bottom outperformed, but who bought at the bottom? And who among us is willing to sacrifice some return for the comfort of avoiding draw downs? I hope to answer some of that this coming week, but like some I'm going home to catch the Super Bowl!
I created the chart after the Sept. 2018 plunge in the markets got underway because some of my friends asked me how low the markets could go. The initial plunge halted itself at the upper trend line which connected the March 2009 low to the first major low in the recovery. What began, in all likelihood, as a technical bounce has gained steam as some of the uncertainty that faced the markets in the Fall has been removed. Most obvious is the now 'cautious Fed' and the appearance that the trade talks between China and the US are more likely to get resolved than continue for a protracted period. Now on 2/17 the US is weighing a 60 day extension before imposing further tariffs and there is some talk that US Reps and Chinese officials are trying to draft a memo of understanding re: a trade deal. It was bullish that the markets shrugged off a terrible retail sales report this week and another report indicating auto loan delinquencies are trending higher. Market sentiment, which I read as neutral at the moment, will have to become more overwhelmingly bullish for a serious pullback to occur. If you have just begun following this chart list, it is an interesting time. Huge dive in the Fall, followed by huge rally post XMAS eve. This list was created for friends of mine to follow the monthly MACD signals which should keep them out of serious trouble. (We are all retirement age) Those signal are on a sell and decisively so. It took a lot to move the indicators to bearish and it will take a lot to move them back to bullish. If you want faster acting signals, perhaps the monthly MACD isn't for you.
The SP 500 has pushed higher than I originally expected based on the technicals. I thought that there would be a retest of the December lows by now. But as this market has moved higher, the Fed has shifted stance and the trade war looks as though it isn't moving forward. The flush in the Fall was serious enough to shake even strong hands out. Now those managers of funds that are out of the markets are under stress to compete with the 2019 returns which are quite positive, if one ignores the 2018 4th quarter massacre. Now we have replaced panic, with a fear of missing out.
By the end of our seasonally strong period, that ends May 1, if not sooner, I expect sentiment to get too bullish and for markets to correct. Regardless, the monthly MACD sell remains in effect and I will respect it. It will turn if this strength continues. We are still below the highs when the signal triggered. There is no need to panic and think this doesn't work. I don't wade deeply into fundamental data, but I don't totally ignore it either. Overall earnings estimates are in decline from where they were in Oct. Last I noted, some 6% lower. (early Feb.) I will not argue that the flush that bottomed day after XMAS may have been more than warranted if 6% is the extent of the slowdown. But we don't yet know if it is. The Monhtly MACD turns slowly and protects one from reacting too frequently to the noise the market generates daily, hourly and minute to minute. Time will tell if we are in the midst of correcting a glitch, as the President said, or if the warning the market gave in the Fall, which the MACD foretold is the proper side to be on. I'll stick with MACD for now. It will turn back in time and we will be safer to re-enter the markets when it does.
My current hypothesis (January 7) is that we could be in a cyclical bear market similar to the one that we had in 2015/2016. That cyclical bear ended in February 2016 after the indices and NYSE 200 day moving average breadth indicator bounced off double bottom patterns. I've inserted the 2016 bottom pattern and the current chart with the same indicators into the list so that we can watch and look for similarities. As Yogi said, you can learn a lot by looking...so we will~ 2/17.. .Doesn't appear this market is going to follow the pattern from 2016. We have pushed up much further in breadth off the initial low and have not yet made a retest. As alluded on other charts in the list, there are more catalysts in the air now than 2016 and the newsflow has been consistently supportive since the Dec 24 low was put in.
The double bottom of the 200 day moving average % and its reversal surge above the trend line connecting prior highs clued me into the end of the 2015/2016 cyclical bear. Using this look back chart to compare to the current situation.
Trend lines can help spot important inflection points and have I put a lot on this chart. As alluded to in previous notes, which this replaces, I was initially looking to see the lows retested before now. But this is the third year in a Presidential cycle and the incumbent has been trying hard to assuage the climate of fear that played a good part in the big decline that occurred this Fall. I have learned over the years, trying to trade the markets on a short-term basis that to do so sentiment is perhaps more important than chart patterns or fundamentals. Sentiment has gone from rock bottom now, to a neutral level, according to my read of the American Assoc. of Individual Investors survey and other information. I thought we'd likely see a sell-off late day Friday 2/15, before the three day President's day weekend. Didn't happen, and that is near-term bullish. I'm sticking with my longer-term signals and am still out of the markets. The market always tests the convictions of all participants. Most lose if they trade because they can't develop any principles they trust. I trust the monthly MACD to keep one on the right side of the market, over any considerable period of time. But as we can see now, counter moves can certainly be large.
This is a commonly used Vanguard ETF that mimics that entire market. It provides greater diversification than the SPY that mimics the S&P 500. Accordingly, I prefer it. It has only existed 20 or so years, so its chart is not as long as the SPX presented above. Similarly I've marked the MACD buy and sells with green and red vertical dotted lines.....
I've marked the monthly MACD buy and sell signals here for the Nasdaq 100. Traders should use the etf QQQ, which mimics the NDX 100 for trading purposes. This etf has a heavy weighting (39.9%) in the FAANG stocks. Facebook, Apple, Amazon, Netflix and Google.
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