Investment Flow Chart Analysis -1-29-2021
Many times, I have been asked to set forth the methodology by which I make decisions about whether to invest either long or short in the stock market. So here goes ….
The methods described below borrow heavily upon the lessons learned from Ernie Zahn, Ralph Hansmann and William T. Golden at Cornell, Linder & Co. during my time on Wall Street in the 1960’s utilizing fundamental research including Point & Figure charting.
Since then, I have incorporated ideas from William O’Neil’s CANSLIM methodology, Ian Woodard and High Growth Stocks as well as Stock Charts.
The first decision is to determine what the daily, short-term or long-term trend of the investment market is. To make this determination, look at the 50- and 200-day simple moving averages on a weekly chart as shown below to determine if both the NASDAQ and the S&P 500 averages are either both positive, both negative and/or split.
As can be seen in the above charts of the NASDAQ and the S&P 500, the two indices are above both the 50- and 200-day simple moving average lines, so the presumption is that the market is in a longer-term positive trend.
Now, the question is whether the positive trend will continue or whether a fall below the 8-day simple moving average on higher average volume or the S&P 500 might suggest that change is coming. The NASDAQ has fallen close to the 8-day line and volume has surged to the highest level in the past 24 months.
So now the question is whether to:
1. Be long,
2. Be short, or
3. Be on the sidelines.
Remember pigs get slaughtered.
The daily charts show recent daily action in both the NASDAQ and the S&P 500. The view to the right of each chart shows in detail recent trends and volume movement.
While longer-term trend shown in the first set of charts suggests a positive market, the daily charts suggest that we might be at a turning point. To get a better handle on whether the market is moving from a “Market in Uptrend”, we take a look at the Accumulation/Distribution chart shown below. As can be clearly shown, the number of “A” rated stocks according to IBD has clearly peaked and has now fallen as of Thursday to below the green zone. The methodology which I use has a rule that states that when the line falls below the green zone, profits need to be taken. Further, when the line falls below the red line, the trading portfolio should be in cash.
The Strategic Investing Portfolio went to cash thanks to its selling rules on January 27th. In running the various screens in both IBD stock screener and StockCharts, we have not found any positions in which to recently invest. However, we have placed a few on the Watch List.
We continue to run the various IBD and StockCharts screens each day but the current political and economic conditions suggest that prudence is justified.
Many people have bewailed the mess surrounding GameStop and other stocks. However, changing the rules to prevent a breakdown in the markets has been around for centuries. The bullion banks and the commodity exchanges have changed the margin requirements multiple times to prevent them from going bankrupt. Doesn’t anyone remember the Hunt’s foray into the silver market back in the 70’s and how the exchange survived?
Nothing is new …. Just a new group of sheep to be shorn.
31 January 2021