Weekly Market Commentary

publication date: Aug 24, 2019

NOTE;  All posts are opinions only.  No investment advice is given.  Consult with a financial adviser and do your own due diligence before trading.
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Market Summary for Week Ending August 2, 2020

 

The stock market is at a critical point, as we enter the traditionally weakest time of the year (August and September).  Read on...

 

Chart signals continue to way outperform the traditional "buy and hold" approach.  Assuming one had traded 1x leveraged $SPY shares at each of my entry/exit points, these would be the compounded year-to-date results:

 

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January 1, 2020 - July 31, 2020*

Proprietary Trading System ("Shadow Index"):  +74.5%
Standard Buy & Hold S&P 500 Strategy:            +  1.3%


* Prices assume that you traded an equal % of your portfolio in $SPY shares (with no options leverage) at each of my entry/exit points.  Past performance doesn't guarantee future success.

 

Trading 3x ETFs could have tripled this performance, and proper selection of strike prices and expiration dates could have made options trading results even more lucrative.  Source:  https://www.tradingideas.info/articles/portfolio

 

So, how do the longer-term charts look now?  The major indices have had a tremendous rally from March lows.  The Nasdaq has moved significantly into ATH territory, and the $SPX has rallied 49% since March 23rd (and is up 1% YTD).  But are these price levels legitimate?  The $VIX is nowhere near its pre-Covid19 levels (reflected in the chart below, comparing $SPX to Inverse-$VIX).  This imbalance will eventually stabilize, either by a correction in equity prices or a collapse in $VIX due to traders closing hedges.

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Either scenario is possible over the coming months, and either resolution will result in significant price swings.  So, is there any indication as to which outcome is more likely?  This is where I differ from just about everyone else who seems to have a strong opinion.  The short answer is: No.  The next few months look like a toss-up, with almost even odds for a pullback vs. a continued melt-up.  The reason is the relentless printing by the Fed and Congress, which is grossly distorting price discovery.  In the bullish case, there's just so much newly-printed money (currently $3T from the Fed and another $3T from Congress through July), that prices have nowhere to go but higher due to extreme asset inflation and dollar devaluation.  In the bearish scenario, we may be completing 5 waves up from March lows, just in time for the weakest 8-10 weeks in terms of seasonality. 

Although the long-term outlook for stocks is bullish (due to hyper asset inflation caused by the Federal Reserve), the shorter-term picture is not clear at all.  The best we can do is watch for near-term signals around the 60min time frame for short-term swing trade opportunities, until something clearer develops on the daily charts.  All of this means that traders need to remain flexible and lose any personal bias they may have, as the market may switch sentiment from day-to-day or hour-to-hour this week.