Locked in a Trading Range (Chartist Newsletter 5/14/15)

For the year-to-date, our Actual Cash Account has gained $44,982 +4.15%. The Aggressive Account is showing a profit of $259,828 +3.98%, while the S&P 500 with dividends factored in is ahead 3.7% over the same period.

For all intents and purposes, we’re still locked in a trading range. The S&P 500 closed out today’s session in record high territory, besting its March 2nd bull market highs by 0.18%. The Dow was also strong, moving to within 0.20% of record high territory. Both of these major indexes are trading above their respective 50-day moving averages, and comfortably above their 200-day lines. The chart patterns are bullish, and have been in that mode for some time. But the trading range persists because there’s not been a solid breakout on the part of these two major indexes, and the Nasdaq, Russell 2000, and S&P mid-cap indexes are still being held in check, along with the advance/decline line. The Dow could possibly record fresh bull market highs tomorrow, or sometime next week. However, when the breakout occurs, it will not be confirmed by the Dow Transports, which have broken support and continue to lag badly. In fact, the Transportation Average will be falling short of confirmation by a wide margin, unless they really catch fire.

When the Dow broke through overhead resistance into record high territory last October, the Transports confirmed, in fact, they were three days early. After correcting through the first half of September, the Dow again made record highs on December 23rd, with the Transports confirming three days later. Then came another pullback by the Dow, followed by another breakout in February. On this occasion, the Transports did not confirm. Over the next six sessions, the Dow gained another 8/10 of 1%, hitting its current highs of the year on March 2nd. One of the main reasons analysts are fretting about the price action of the Transports is due to the fact that they did not confirm the upside breakout of the Dow back in October of 2007, which occurred just before the onset of the last bear market. The Transports peaked in July of that year and were a good 10% under their highs when the Dow made its final breakout. Going back still further, the Transports again failed to confirm the Dow back in January of 2000, when the Dotcom boom was winding down.

Having said that, we should point out that our long term models are still highly bullish. Based on the models, the odds that we are in a bull market which has further to run are at 85%. That’s why we continue to advise a fully invested position. Long term readers of the Chartist are fully aware that we have an exit strategy that has served us well over the years.

At the outset of the last bear market, our models flashed a sell signal on January 15th, 2008, which was approximately 11% off of the bull market highs. Long term investors who were acting in sync with our real money accounts, the Actual Cash Account and the Aggressive Account, were advised to sell all stocks to move to a 100% cash position. Over the next fourteen months, the Dow proceeded to fall 5,954 points, or 47%. The experience of the last bear market alone is reason enough to deploy an exit strategy.

There is nothing more demoralizing for an investor than to be loaded up with stocks during an extended bear market. At the Chartist, we invest our own money right along with our subscribers. We are not asking them to take any risks that we are not willing to take ourselves. We have every confidence that our models will move us to the sidelines with the bulk of our capital intact. In the meantime, it’s still a bull market, and in bull markets, you want to be fully invested. Our advice at this juncture is to stay the course. In fact, if you have cash on the sidelines, we would advise deploying it the next time we get an all clear from our short-term models.