MLR - PMP 9/26/14

Published : September 26 2014 at 9:30 ET

Major averages tumbled after orders for durable U.S. goods plunged by a record 18.2% in August after a record 22.5% gain in July. This drop was mainly due to the volatile transportation sector, which, if stripped out, would have actually resulted in a rise in durable goods orders by a seasonally adjusted 0.7%. That said, the market clearly was looking for an excuse to correct as everyone knows durable goods orders are volatile.

Volume was lower on the S&P 500 but higher on the NASDAQ partly due to AAPL's gap lower on huge volume which also pulled down other tech stocks in sympathy. Leading stocks held up surprisingly well relative to the drop in the major averages, as leading stocks normally fall appreciably more, which suggests some minor form of selling exhaustion in leading stocks. That said, leaders are not looking well. But leaders have looked very unwell near market floors.

Since January 2013, the S&P 500 has found a floor within a couple percent once it closes below its 50dma, with -2.9% being the worst case so far, when the S&P 500 closed below its 50dma on January 24, 2014, then found its floor on February 3, 2014, 2.9% below the close of its 50dma on January 24, 2014. Keep in mind there have been five other such situations since January 2013 where the S&P 500 found a floor below its 50dma typically within 1-2% of its close below the 50dma, even though selling pressure had significantly increased. Thus Market Direction Model (MDM) which is adaptive may opt to to see the market through this correction along with the UVXY model, with 2.9% below yesterday's S&P 500 close as the failsafe for both models in the event "this time is different". Knowing this as the worst case scenario, members may wish to adjust their position sizes in any ETFs they are holding. That said, the risk in going to cash right now is that the market may baby step higher from here after finding a quick floor within 1-2% or less from where it currently sits.

Notably, since QE went full bore in January 2013, whenever the S&P 500 has fallen through its 50dma closing down more than 1%, it has always done so on materially higher volume than the day before whereas yesterday's volume was less than Wednesday's volume. Further, if you draw a trendline through the NASDAQ Composite from Nov 2012 to Feb 2014, then draw a trendline from Apr 2014 to present day, the slopes of the trendlines are about the same with the price resting on the current trendline, suggesting that the NASDAQ Composite is within 1-2% of its low.

So should the market fall further in the days ahead, it is liable to be close to putting in a floor as it has done so each time before. Of course, this time could be different, in which case, the models will move to cash then wait for reversion to the mean to switch back to a buy signal for MDM and either remain in cash or move to a sell signal for UVXY which moves counter to the markets.

Keep stops tight as usual if you're holding stocks, and if you're trading ETF(s) using the timing models, keep stops within your risk tolerance levels, whether or not you're trading around a core position.

Note: Gil remains bearish overall in the current environment. This bearishness can quickly change depending on what the market serves up in the days ahead as stocks have a shorter term time frame. As for ETFs, we are in a very tricky QE manipulated environment, so it is key to keep losses contained whether you're dealing in stocks or ETFs.

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