July 28, 2017

Short-Term High-Probability, Mean Reversion Indicator – EAFE (EFA) Moves In Short-Term Extreme

This past week marked the two year anniversary of the current bull market. The anniversary of the current bull market was quickly met with selling this past week as the Dow, S&P and Nasdaq lost 1.0%, 1.3% and 2.5, respectively.

Yes, the latest bull market has made it to the somewhat elusive two year mark. Only fourteen out of thirty-three bull markets have made it past two years. That isn’t an overwhelming statistic, until you start to compare the average returns of the prior two years bull runs to the current bull market. The average return for previous bull markets was 43.6 percent which is roughly half of the current 86.7 percent return of the current bull market. There have been only two bull markets that have exceeded the return of the current bull market.

In other words, only two out of thirty-three bulls markets have performed better during their two year anniversary than the current bull market. So most would probably conclude from this information that the current bull market is somewhat stretched, but when delving further into the statistics it was quickly noticed that all fourteen made it to a three year anniversary. Let’s hope the current bull market leads the same fate.

As for the technical side of things we do not have any short-term technical extremes in the market. All of major indexes are currently in a neutral state.

However, it should be noted that the S&P 500 (SPY) is getting very close to closing the gap from February first at $128.78. A move to this level over the next week would certainly put the major market benchmark into a short-term oversold state.

Several of the major indices broke through areas of strong support Friday and made a series of lower lows throughout the week. This past week also marked the first time in six months that the S&P fell below its 50-day moving average.

Next week brings options expiration which typically sides with the bulls. I do think that volatility will once again reign supreme with the VIX picking up steam for the third consecutive week. This should make selling options even more attractive.

Strategy Discussion

EAFE (EFA) moved into a short-term oversold extreme Friday. The RSI (2) is slightly above 5 so I would prefer to see a dip below that level before a trade is placed. As always, subscribers keep on the lookout for a tweet or email if indeed a trade alert does occur. So far March has left the strategy with no trades, so I am hoping that a set-up comes our way next week. However, I will not force a trade. Remember, patience pays.

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Short-Term High-Probability, Mean-Reversion Indicator – as of close 3/13/11

Benchmark ETFs

* S&P 500 (SPY) – 42.0 (neutral)
* Dow Jones (DIA) 42.3 (neutral)
*Russell 2000 (IWM) – 36.6 (neutral)
* NASDAQ 100 (QQQQ) – 37.0 (neutral)

Sector ETFs

*Biotech (IBB) – 52.9 (neutral)
* Consumer Discretionary (XLY) – 49.1 (neutral)
* Health Care (XLV) – 45.5 (neutral)
* Financial (XLF) – 45.8 (neutral)
* Energy (XLE) – 36.7 (neutral)
* Gold Miners (GDX) – 37.7 (neutral)
* Industrial (XLI) – 48.1 (neutral)
* Materials (XLB) – 39.9 (neutral)
*Real Estate (IYR) – 50.8 (neutral)
* Retail (RTH) – 52.0 (neutral)
* Semiconductor (SMH) – 27.1 (oversold)
* United States Oil Fund (USO) – 40.4 (neutral)
* Utilities (XLU) –61.0 (neutral)

International ETFs

* Brazil (EWZ) – 37.1 (neutral)
* China 25 (FXI) – 54.8 (neutral)
* EAFE (EFA) – 23.8 (oversold)
* South Korea (EWY) – 39.1 (neutral)

Commodity ETFs

* Gold (GLD) – 46.3 (neutral)

Ultra Extremes

* Small Cap Bear 3x (TZA) – 61.7 (neutral)
* Small-Cap Bull 3x (TNA) – 35.7 (neutral)
*UltraLong QQQQ (QLD) – 36.0  (neutral)
* Ultra Long S&P 500 (SSO) – 41.5 (neutral)
* Ultra Short S&P 500 (SDS) – 56.7 (neutral)
* UltraShort 20+ Treasury (TBT) – 39.6 (neutral)

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Kindest,

Andy