By Ryan Redfern, CMT, ChFC
1/ The Brain Game
2/ Sector Count
3/ Final Thoughts on “Ducks”
4/ McClellan Oscillator Turns Positive
5/ NAAIM Exposure Index Update
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1/
The Brain Game
The best lessons aren’t always about what we see in the charts, but more in how we respond to them. Can we act with conviction when we have a good chance of being wrong? Can we get back up after a string of losses and keep playing? I’d be remiss to not mention the importance of investor psychology in all of this investing game.
It’s one of the big reasons why I became a CMT and spend the majority of my time on charts now. Fundamental analysis can tell you “what” you should be buying. But it does very little to help you answer “when” to be buying. Sometimes Value stocks can stay cheap for a long, long time. And I know most investors don’t usually have that kind of patience.
If you don’t have your mental game right, no amount of chart knowledge will make you succeed. I try to never forget that investing is as much a mental game than anything else.
Courtesy of Traderlion, Dr. Van K. Throrp
2/
Sector Count
The S&P500 was almost flat on the day yesterday. But there still seems to be enough strength behind its sectors to suggest the move upward isn’t quite over yet. And if Seasonality around Elections is correct (see yesterday’s update) then we have another few days to run-up before the seasonal, pre-election weakness sets in. But for now, let’s look at the current trend of the market…
On the positive/buyers side, we have 10: (XLB, XLC, XLE, XLF, XLI, XLK, XLP, XLRE, XLU, XLY). The broad strength across so many sectors doesn’t give me much reason to be cautious right now. Even with a choppy and sideways day yesterday, nothing has changed in this assessment.
On the negative/sellers side, we have 1: (XLV only). Healthcare remains the lone sector in a market-defying down-trend and it looks like it is heading towards making the next lower-low as I mentioned yesterday.
Courtesy of Optuma
3/
Final Thoughts on “Ducks”
By now you should know I refer to the data points on Julius de Kempenaer’s RRG charts as “ducks” that swim in a clockwise fashion around the “pond.” I view these relative to T-bills as I like to know if each of the sectors are acting stronger (both Relative Strength and Momentum) than the “risk free rate.” If I had a mandate to be 100% invested all the time, then comparing sectors to the S&P500 or another index would make more sense. But I don’t. So I don’t.
You can really see the strength of Financials (XLF) shooting up and to the right, well into the Green (Leading) box. What has me a bit baffled is that Healthcare (XLV) is peaking up into the Blue (Improving) box, while it looks pretty ugly on its own chart.
Technology (XLK) and Industrials (XLI) are both hovering between Leading and Weakening, but being so far to the right on the graph suggests they are still plenty strong via Relative Strength against T-bills.
This is a very mixed set-up that isn’t as telling as when they all move in unison from one area to another. When that happens, the movement of the broad index becomes fairly easy to predict. But for now, we’re just waiting for the ducks to get back to swimming in-sync.
As I mentioned Monday – I try to post this chart every Friday on https://x.com/RyanRedfernCMT if you want to keep following the “ducks” and see what they are up to. Or just stop by to say HEY!
Courtesy of Optuma
4/
McClellan Oscillator Turns Positive
The McClellan Oscillator crossed back above the “0” line suggesting there may be a continued push higher on the major US Indices. I like to use a 3ema on the line to help filter out false signals and potential fake-outs. Though, mine is not as pretty as David Keller, CMT’s version of this chart – he makes the entire background match the current state: Green (good) or Red (bad). I just use lines.
Courtesy of Optuma
5/
NAAIM Exposure Index Update
This week’s NAAIM Exposure Number came in at 81.68, lower than my reported 95. But I’m right there, in-line with other active managers this week. The high readings tend to correlate to an upward trending market. Where it can be interesting and useful is when you see dramatic pullbacks in this number during a longer-term up-trend.
On Monday I mentioned briefly the work that Rob Hanna at Quantifiable Edges has done on this index – looking for an edge. The basics of his work break the Index into quintiles:
Below 20
20-40
40-60
60-80
and over 80 (since the index can be 100+ in extreme cases).
Then looking at the odds of an investable edge when the Index pulls back into each quintile. I don’t have enough room here to give away all the answers, but in a long-term uptrend, getting a pullback in the NAAIM Exposure Index (generally below the 60 line) can have an edge on a one-week timeframe.
And finally, I’d like to thank Investopedia and the CMT Association for having me on as a guest contributor this week. It’s been a lot of fun (and a lot of work), but I’ve enjoyed sharing so much of what I think about on a daily basis when looking at the markets. Hopefully you were able to pick up something from my approach to technical analysis and investing in general.
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Originally posted 18th October 2024
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