I Would Love To Sell But...

I feel like a cat on a very hot tin roof. And it isn't the heat wave that's causing my furry investment pads to cook. It's this damn summer bounce within a cyclical bull within a secular bear that's making me so jittery.

I would rather see the bearish signals first generated by certain global markets (Europe, most notably) spread to all markets and produce a clear downside signal. Unfortunately, when it comes to the social science of investing the best laid plans of mice and men have a nasty habit of following their own path and rhythm.

So, as much as I want to write the blog posting before summer's end fittingly titled "Everyone Out of the Pool", I cannot. Or as Orson Welles said in a commercial of years ago, "We will sell no wine before its time". For me, the same applies to the current stock market environment.

Here is why:

1 - The Mega Trend* for the S&P 500 never went negative. As I noted several weeks ago (Death Cross: Fact and Fiction), the false signal produced by the so-called death cross using the simple moving average was not generated using the exponential moving average. Therefore, the bullish Mega Trend is intact. Until the market generates a Mega Trend reversal, the existing trend (which is bullish) must be presumed to be in force. This is quite clear in the first chart.

2 - There are still no important divergences - not internally (Momentum and MACD, first chart) nor externally (inter market, see chart #2). None. Zero. Zippo.**

Re internally generated divergences: as I noted last week it is only when both momentum and MACD generate a divergent signal from price that the odds of a near term trend reversal increase to a sufficient degree to take action. The past week has proved that view. And here we stand one week later with momentum now rejoining MACD in bullish near term confirmation of price (first chart).

Investment Strategy Implications

Cautiously bullish (equity exposure between 60 and 90%), generate absolute returns, lose alpha. Could be worse.

*Use the search function in the top left section of this blog to find prior postings (there are many) re the Mega Trend.

**It is true that there are times when fully synchronized and confirmed markets do reverse themselves. But they are the exception and not the rule. Therefore, it seems advisable to go with the higher probabilities that divergences produce.