Chartist Long-term Models Flash A Sell Signal

The Chartist Mutual Fund/ETF Hotlines were activated on Monday, August 24th 6:00 PM East Coast Time. The following advice was given:

Our long-term models have flashed a sell signal. We now advise investors acting in sync with our Actual Cash Account to reduce all positions by 85%.

There are no changes to the Balanced Account; continue to hold all positions.

Per our hotline advice, we sold the following day Tuesday August 25th. From the sale of the ETFs, the Actual Cash Account garnered a profit of $317,405. This real money account also received dividends of $52,260. The net gain was $369,666 + 48.3%. The printout on page 3 shows the realized gains and dividends for all of the closed out positions. The results of the sales are being factored into our long term track record, which is available to any subscriber at any time, upon request. The Chartist Mutual Fund/ETF Letter is one of the very few financial advisors that acts on its own advice, featuring a real money portfolio.

The Actual Cash Account was started with an original $100,000 on August 29th, 1988. In the interim, it has grown to $1,356,142 for a gain of 10.13%, annualized. Since the inception of this publication, we have always featured a printout of the Actual Cash Account on the front page.

We would be the first to tell you that it has not always been smooth sailing. However, we have avoided the major portion of the bear markets that have taken place over the period. In the last bear market, our long term models flashed a sell signal on January 15th, 2008. Between the date of the sell signal and the ultimate bottom on March 9th, 2009, the benchmark S&P 500 fell 51%.

The fact that we invest our own money right along with our subscribers, in our opinion, gives us a distinct advantage. We say this because when you have your own money at risk, you are more apt to learn from your mistakes. The hypothetical investor can go on losing money year after year with no consequence – “no pain, no gain.” We have refined our strategy over the years, but basically, we are using the same methodology that we used back in 1969 when we started our senior publication, the Chartist, which concentrates strictly on stocks. The following is a direct quote from our premiere issue:

“Our methodology does not try to outguess the next move in the market. It is a trend-following system that focuses on detecting intermediate to major trends and changes in those trends.

Quite frankly, we are so convinced that our strategy is a winner that we are investing $100,000 of our money in accordance with the Chartist Mutual Fund Letter’s recommendations. There is nothing hypothetical about this account. It’s going to be real money deployed in a real world situation. It is our contention that advisors who ask clients to take risks that are inherent with stocks or mutual funds should be willing to take the same risks themselves. Just like our senior publication, the Chartist, we put our money where our advice is, and feel quite strongly that other advisors should do the same.” – September 12, 1988

With our models in a negative mode, we advise a cautious 15% invested position versus 85% cash. The chart patterns of key indexes are bearish all across the board and that includes the great majority of Asian and European markets. Since May 20th, which was when the benchmark S&P 500 recorded its highs of the cycle, 22 out of the 26 country ETFs that we track have lost in excess of 10%, and half have lost 15% or more. All 26 are below their 50 and 200 day moving averages, which, in the majority of cases, have rolled over and are heading south.

Considering the overall carnage, the US is actually giving a good account of itself. As recently as July 20th, the S&P 500 was only 0.11% away from record high territory. Since that time, it has tumbled -8.3% and has been down as much as -12.2%. Over the same time frame, the Tokyo Nikkei has lost -11.9%, Paris -9.5%, London FTSE -8.7%, Frankfurt Dax -12.1%, Hong Kong Hang Seng -17.6%, and Shanghai Se Composite -20.8%.

There’s been a big shake up in sentiment. The latest from Investors’ Intelligence now shows 27.8% of advisors in the bullish camp with 45.4% looking for a correction, and 26.8% outright bears. This is the largest contingent of bears in around four years. A shift of this magnitude could set the stage for an effective bottom. It is certainly a possibility; however, it is going to take time. The first thing we need to see is a sharp contraction in daily volatility. The benchmark S&P 500 has posted gains or losses of 1% or more in 8 out of the last 11 trading sessions and it has gained or lost 2% or more over the same time frame. The 2% plus readings are the most alarming. Prior to August 20th, there had been only one 2% day since December 18th of last year.

We would also like to see some improvement in the advance/decline numbers. As you can see by the charts on page 2, the advance/decline (A/D) line continues to trace out a pattern of descending highs and lows, which has been in effect since late April. The A/D line closed below its 200 day moving average on July 8th, which marked the first time it had been below its 200 day line on a closing basis since November of 2012. Advance/decline volume, which also peaked in April, has also been extremely weak.

In closing, we should point out that we do not have a crystal ball, and the possibility always exists that the market can resume its upward trend after a sell signal. That fact should be accepted and understood as being part of our methodology. It is inevitable that there will be times when we buy back in the market at a higher price than when we sold. Our models do not predict the market, but only react to it. When they indicate that the odds favor a significant decline, we sell for the primary goal of preservation of capital. And while the yields are almost nothing in the current environment, it is far superior to being locked into a full-blown bear market. Money market funds are our insurance policy. They are a guarantee that our capital will be intact to be deployed on the subsequent buy signal.