Prepare Your Portfolio for Fall Volatility
U.S. stocks last week bounced a little, but all in all it remains a snoozy environment for stocks as corporate, central banking, political and geopolitical headlines continue to seem unable to move stocks in a meaningful way. As such, I continue playing my “less is more” card this August but with one leg have begun to protect the portfolio against a potential spike in volatility in the September-October period.
Over the weekend, I sent a special note to my clients and subscribers and reminded them of the following sports quote:
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“Offense wins games but defense wins championships.”
Successful traders and investors are mostly concerned with playing defense, i.e. focusing on risk rather than on reward. From a seasonal and tactical perspective, this largely means staying out of choppy market periods and patiently waiting for trades with better odds to set up once again.
As a result of the recent choppiness in stocks and the marginal deterioration in market breadth, my proprietary market trend scanner algorithms now only have the technology and utility sectors of the S&P 500 in ‘near-term bullish’ mode while the rest of the sectors including the S&P 500 itself are in near-term bearish trends, albeit only marginally so.
To gain perspective, let’s flip through some charts of the major indices.
The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) last week once more held its blue 100-day simple moving average and remains in the well-defined up-trend from the early 2016 lows. In my eye, there is little to do in the index at this juncture except for possibly buying some protective puts or put spreads for what seasonally tends to be a more volatile market environment in the September-October period.
Upside momentum as represented by the MACD oscillator at the bottom of the chart has been making a series of lower highs in recent months and while that alone is no catalyst to freak out and sell all stocks, it is worth noting and does marginally increase the probability of a 5% or more corrective move.
With implied volatility still very cheap (although the VIX making higher lows versus the July lows) buying portfolio protection is an attractive trade at this juncture.
Moving averages legend: red – 200-day, blue – 100-day, yellow – 50-day
The Nasdaq 100 as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) also had a small bounce last week but continues trading in a choppy fashion.
Here too, notice the lower high in momentum (MACD topping out in June and making lower highs since) while price marginally pushed to a higher high in late July before consolidating lower.
Ultimately it is momentum that tends to win this game at least in the near term, which is to say that the QQQ ETF could see lower lows still and push toward the mid $130s if and when volatility in markets finally picks up some.
Given the current state of stocks, it would require a significant bullish reversal on a daily or weekly closing basis across the indices to get me interested in buying once more.
Bullish and bearish reversals are an integral part of profitably navigating the stock market and for those unfamiliar with these strong bullish reversals, I will be holding a special webinar Aug. 30 for InvestorPlace readers on how to find high-probability trade setups using these powerful moves. Register HERE.
Possibly more concerning for the Nasdaq 100 is that the heaviest weighted stocks no longer trade in synch like they had done for much of the year. Shares of Amazon.com, Inc. (NASDAQ:AMZN) for example are now about 13% off their late-July highs. On the above chart, I plotted AMZN stock versus the QQQ ETF and the stock’s relative under-performance is obvious.
If and when this type of price action spreads to some of the other large holdings of the Nasdaq 100 it could quickly turn into a slippery slope, at least for a short while.
In summary, playing strong defense and doing less in the stock market remains the name of the game in this late-August period from where I sit. Buying some index protection or cutting long positions somewhat would seem like a sound move at this point as we slowly meander toward what traditionally is a higher volatility market environment in September and October.
Check out Serge’s Trade of the Day for Aug. 28.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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