Position Update

Yesterday our behavioral model flashed the sell signal for both the S&P 500 and the Nasdaq 100. We completely closed out our long positions in the SPY (S&P 500) and QQQ (Nasdaq 100). We still have some remaining long positions in the Dow Jones Industrial Average ETF’s (DIA and UDOW), but it appears only a matter of time before the behavioral model for this index takes a turn for the worst.

We are using the strength in today’s market to build our bearish positions in both the Nasdaq 100 and the S&P 500 using the several inverse ETF’s (listed below).

The chart that follows shows our behavioral model for the Nasdaq 100. We drew two red lines depicting a series of higher highs for the index with the corresponding lower highs in our model. This is basically telling us that the moves higher on the index are not fully supported by the appropriate levels of volume. What we would hope to see on the model is the gray trigger line drop below -1.0.

This would represent a pull-back / correction that is needed before the market can resume its upward trend, in our view.

When analyzing the data, one should know that over the past thirteen years, the model has provided a total of 31 sell signals for the index. Of the 31 sell signals, the index went on to offer us the ability to profit from the downside a total of 26 times (83.8%). The average cycle per sell signal is 8.8 weeks over the same time period.

Bottom Line: We have very little long exposure to the broad indices and have started to build our bearish, inverse portfolio. We anticipate a soft stock market as we progress into the summer months.

Joseph S. Kalinowski, CFA