The Market Read 10/28/12

What is the market saying?

Looking at my chart on SPY (S&P500), we are still in an Exit Long stance. In reality, I am biased long based on signals and systems on different portions in my accounts. I have been debating letting the SPY signal be more of a Master switch like IBD suggests. Only go long when the main signal is long and override all other system signals. That makes sense to me. I will consider doing that starting January1, 2013. A New Year. A new methodology.  The signals on SPY have been remarkably accurate as anyone that has seen my blogs from day 1 will see. Also, the signals are infrequent, so we are not bouncing back and forth. I did increase my hedge positions to neutralize steep losses on longs. But the market is now entering its best 6 months of the year. Why do we then feel like a let down is ahead of us?

The elections – neither candidate is serious about the deficit. Instead we will kick the can down the road. Slow growth is more likely and slow increases in the market. The fiscal cliff could slow things down depending on who gets elected. But the fiscal cliff is an exaggeration compared to the fiscal abyss facing us a few years ahead when our Trillions of debt will finally overwhelm us. Politicians don’t really want to take anything away as that hurts them from getting elected. They prefer to give us the candy we are used to getting. One party gives their candy to the rich and the powerful (the military) and the other to the poor and now the lower middle class. Neither has the stomach to do what is needed - cut spending, cut entitlements and raise taxes on those that can afford it, including dividends on the rich.

I am still wondering how to take advantage of the fiscal abyss facing us. I am listening to “The Big Short” by Michael Lewis about the few who could see the sub-prime loans melt down ahead and how they advantaged their positions by buying Credit Default Swaps.

I am also working on my system on the NASDAQ. It is looking pretty good right now. I ran my top trading systems over three time periods; 2002-2005, 2005-2008 and 2008-2012. What was interesting is that most of the systems that behaved well in one period did not fare as well in another, with the exception of a couple. Then I took this base method and used that to create entry and exit points within the primary trend. The QQQ chart is show below showing the signals. The system and rules have to be finalized and written down and then back tested manually before trading. I do not want a losing year. The method is based on end-of-day. If I trade this method using options on the Q’s to begin with, I will prove it out with a relatively low risk. In fact I am thinking of using both straight calls and puts as well as selling credit spreads to take advantage of the time value of money during sideways moves that occupy the markets about 40-50% of the time. More on this method to follow.