• Weekly Comments For August 4, 2014

    In the Friday daily comment, I wrote:

    "The ECI climbed 0.7% in the second quarter after a 0.3% increase in the first quarter. Economists had expected a 0.5% gain. The employment cost index (ECI) reflects how much companies, governments and nonprofit institutions pay their employees in wages and benefits.

    "If the ECI increases, it means that inflation is finally making its way down the salary chain and this will prompt the Fed to increase rates sooner than expected. (On Wednesday, the Fed stated it did not plan to increase rates soon.)

    "The 10Y Treasuries quickly dipped on the news and then bounced back up, but that was enough to spark a market sell-off that continued and intensified by the end of the day."


    The NFP report did not show that employment was under stress and as a consequence, interest rates reverted down (Treasuries rose sharply).



    The stock market corrected steeply on Thursday and then failed to bounce on Friday. This failed bounce came as a surprise, because since 2009, sharp one day sell-offs had been followed, on average, by a bounce.



    The fact that this bounce did not materialize is not market positive. It indicates that the markets were just looking for a pretext to sell and even when the reason for a sell-off disappeared, the bounce was not there. This is how a new downtrend typically starts: selling generates more selling just to protect a portfolio. The fear of losing is stronger than the fear of missing a new rally.

    The big question is of course, What now? Are we already oversold? Should we buy from here? If you look at the trend of the past two years, you can see that we are oversold: the RSI is close to 30 and the S&P500 undercut its 50MA and seems ready to bounce.



    If you look at the MF for the S&P500, to which free access is available here:

    http://www.effectivevolume.com/conte...15-s-amp-p-500

    then you can see that we are at the -1% level. This level looks rather oversold. But is it really?
    I showed with pink arrows all the occurrences when the S&P500 crossed below the -1% MF level. It is easy to see that in most cases, price continued to weaken.



    Since March 2009, I found 22 such occurrences when the MF of the S&P500 crossed below the -1% level. These instances are represented in the red line of the figure below. If you buy the S&P500 when price falls below that level, then we can see that the following two days are still negative and that it takes on average 6 more days to break even.

    However, if you buy when the MF bounces back up above the -0.75% level, then you can make good trades.



    Below are the win ratio figures for the two buying strategies as well as the cumulative profit until D10.





    After the MF of the S&P500 falls below the -1% level, it takes between 1 and 18 days for a bounce above the -0.75% level to materialize, with an average of 7 days. The good point is that we only need to look at the -0.75% level. This is what I would advise for the coming week.

    When a Buy signal is issued by this method, you could also opt to buy one of Mike's High-growth stocks.

    http://www.effectivevolume.com/conte...tock-selection

    An RT Alert system is available at the link below and will remain free until mid or end of September. These figures start moving when markets are open.

    http://www.effectivevolume.com/conte...dd-new-section