The Cost of Money

The stock markets of the major exchanges capped a week of mostly light trading on Thursday with the broader US market indices showing their first weekly loss since the last low in Mid-February. In the US the fall was led by banks and financial stocks but by late in the day the SP500 index has fought back and recaptured most of the days losses. As London was closed at this time the rally wasn’t seen in the UK.

The stock indices came into the week with a 5 week string of gains that took back all of the damage done in January and early February as the FED stepped back from the rate increases communicated in the last quarter of 2015. To add intrigue James Bullard who is president of the St Louis FED, this week, suggested that a case could be made for a rate hike as early as next month. His remarks immediately drove up the value of the dollar and was the probable cause of the selloff in stocks on Wednesday and Thursday. The cost of money remains high in the minds of market players. The Federal Funds futures markets have priced in a 10% chance of a rate increase in April which is up from zero chance a few weeks ago.  A report that showed US durable goods fell by over 2% didn’t help the mood as did the atrocities in Belgium.  Also it seems that 50% of all fracking related loans are close to default due to the sustained low price of oil. This type of news always comes out when the markets are in a much overbought area.

The SP500 (shown below) has found resistance at a 78.6% retracement of the last daily range as noted in my entry of last week. Those traders with a bearish disposition who have studied FIB and harmonic trading patterns will be short from the level. Those who use candle patterns to confirm the position will also be short of the index after confirmation of a bearish “evening star” pattern after the close on Thursday. On VectorVest the leading properties of the MTI indicator suggest that stock indices need to pullback or go sideways for a period. A reading on the MTI of greater than 1.5 invariably causes markets to stall, while, as we saw in mid-February a reading of less than 0.6 invariably causes a change in trend or at least a tradeable rally. The MTI is very special mix of price, momentum and market breadth and its application is literally money in the bank.

david paul

On the LSE the MTI peaked at 1.5 and has turned down to 1.46 after the close on Thursday. Also of note is the fact that the price of the VectorVest Composite of the UK has made a higher high over the past two weeks while the MTI could not follow and made a double top. I always prefer the price and the indicator to be markedly divergent but the pattern does qualify to be labelled as a bearish normal divergence. This as the name implies is another reason to be careful in long positions.

The Primary wave or short term trend of the UK market is down and there is a red light in the price column of the Color Guard. I have talked in this column about the sequence of a market turn. The first signal is the Primary Wave turning in this case to down and the second signal is a red light. Both of these have fired and as a result the most aggressive traders would be short or thinking of going short if the market breaks lows on Tuesday. Also I see that the VV Composite of the UK closed below an 8 EMA on Thursday and that adds considerable to the probability of at least a tradeable move.

The first two signals at the turn are for aggressive traders only. The third signal which is the red light sell being confirmed by the RT kicker system has not fired as yet and the DEW system remains “Long”. The underlying trend is UP and at a value of 1.46 the MTI has a lot of work to do before any reversal will be made. When the MTI falls below 1 the underlying trend is defined to be down. The most conservative signal on VectorVest, the confirmed call is “long”.

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My shares have had a very good week, while the market was flat, with Victoria soaring. The share has a low RS but both technically and fundamentally (based on the RV score on VectorVest) has a long way to go. Dart and Gleeson have broken upwards very nicely and Marshalls came back and “kissed” former resistance which is a good sign. I am holding 7 positions at present and I have made no secret of these in past entries in this blog and within the webcasts that I do every two weeks. The next of the latter is scheduled for next Tuesday 29th March at 130 UK time. If you haven’t got a link to this then please get in touch with our call centre at 0800 014 8974 in the UK and 0800 981 891 in SA.

If a market selloff should occur then a worry is that the bids on the small cap shares in my portfolio just simply disappear and they can come down just as fast as they went up.

My strategy is to hold high VST shares as long as the DEW market timing system is positive and thus I am holding at present. However I will NOT be buying any more shares until the advice of the front page of the VectorVest program tells me that it’s safe to do so.

The program called the upswing from the middle of February exceptionally well and I have no doubt that it will do the same, if the market turns further down. My job is to stay present in this moment and focus on perfect execution of the process. If I do that then the cash will take care of itself.

In the webcast next Tuesday I will again revisit the turn and again press everyone to decide on which of the possible 5 reversal signals that you are going to commit to follow. The key is to take each signal without fear or hesitation. If you recall taking the buy signal after the selloff in the first six weeks of the year wasn’t easy. They never are, but that’s what our business is all about. The good news is that it gets better with a little practice. I have found that somewhere between 8 and 13 trades are required for the “habit” or “discipline” to become engrained. I say at all my trading seminars that “You are 8 to 13 trades away from the trader that you want to become” That’s all.

It’s certainly possible to be an aggressive trader using a CFD or spread bet in one portfolio and to be much more conservative in another. I am personally trying to achieve this goal and I simply use a spread bet on the Ft100 for the aggressive trades. My signal is the Primary Wave turning up (or down) and that the turn is confirmed by a close below the 8 EMA. I am indebted to a member of the Bristol User Group for his research into this simple but very effective trading system.

As mentioned above, in the conservative portfolio, I am “long” only in high VST shares, using the “David’s Big Hitters” search and using the DEW market timing system. My challenge is to get myself out of the way, take the signals as they come and manage the positions well. Please play the Quick Start Course lecture 2 under the training tab on VectorVest where managing the positions is clearly documented.

I wish you all a very happy and safe Easter.

David Paul


26th March 2016

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