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Market Direction Model - Update

The Market Direction Model remains in cash at this time.
Here is a recent article that explains why. Patiently waiting on the sidelines during such unusual situations is key as the various metrics such as the advance/decline line and number of new lows vs new highs for major indices remains bearish. Capital preservation is paramount.  

The CME Fed Fund Futures now show a rate hike in July instead of June while US Treasury yields and the dollar fell Thursday morning after government data showed lower labor costs. There is also some ebullience over the debt-ceiling bill being finalized. But this will cause the TGA to materially rise which will remove liquidity from the markets. Liquidity and market direction show strong correlation in this QT environment that started in early 2022:

I will be watching for a drop in liquidity after the debt ceiling is raised since TGA will jump as per this equation:

Fed balance sheet - TGA (treasury general account) - RR (reverse repo) = Liquidity

Of course, should markets move higher despite the above, the MDM will switch out of cash into the next opportunistic buy signal. Yet major broad indices such as the NYSE Composite remain in overall downtrends. More likely, there will be an opportunistic sell signal assuming the chart above continues to hold true, a fairly safe assumption given sticky inflation, rate hikes, and tight money.

On a risk/reward basis, the MDM has strongly outperformed overall over the last few years due to the material change made in Feb-2019. Patience during historically unprecedented periods remains a prudent course and brings to light a simple and extraordinary passage from Jesse Livermore’s 1940 book, "How To Trade Stocks":

“Many years ago I heard of a remarkably successful speculator who lived in the California mountains and received quotations three days old. Two or three times a year he would call his San Francisco broker and begin writing out orders to buy or sell, depending on his market position. A friend of mine, who spent time in the broker’s office, became curious and made inquiries.”

“His astonishment mounted when he learned of the man’s extreme detachment from market facilities, his rare visits, and on occasions, his tremendous volume of trade. Finally he was introduced, and in the course of conversation inquired of this man from the mountains how he could keep track of the stock market at such an isolated price.”

“‘Well…I make speculations a business. I would be a failure if I were in the confusion of things and let myself be distracted by minor changes. I like to be away where I can think. You see, I keep a record of what has happened, after it has happened, and it gives me a rather clear picture of what markets are doing. Real movements do not end the day they start. It takes time to complete the end of a genuine movement. By being up in the mountains I am in a position to give these movements all the time they need. But a day comes when I get some prices out of the paper and put them down in my records. I notice the prices I record are not conforming to the same pattern of movements that has been apparent for some time. Right then I make up my mind. I go to town and get busy.”

“That happened many years ago. Consistently, the man from the mountains, over a long period of time, drew funds abundantly from the stock market. He was something of an inspiration to me.”

That said, opportunistic themes come along every so often such as the outperformance in alt-currency, lifeboat stocks in precious metals and Bitcoin earlier this year. While this does not impact the MDM which looks to capitalize on broader trends, it illustrates why the trade of a lifetime comes along every several weeks. We remain vigilant as new data presents the next opportunities.

This information is provided by MoKa Investors, LLC DBA Virtue of Selfish Investing (VoSI) is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. VoSI reports are intended to alert VoSI members to technical developments in certain securities that may or may not be actionable, only, and are not intended as recommendations. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to VoSI, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Virtue of Selfish Investing. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2024 MoKa Investors, LLC DBA Virtue of Selfish Investing. All rights reserved.
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