August 24, 2017

Short-Term, High Probability Mean-Reversion Indicator – Range Bound Trading Persists

As I have stated over the past few days, a short-term bounce would occur and today the bounce came to fruition. Nothing too exciting, and if you have been reading my commentary over the past few days you know that I think we are still due for a sharp pullback that, in my opinion will occur after the May expiration cycle comes to a close.

I would be ecstatic to see this market push even higher and into a short-term overbought over the next few days. A short-term extreme in any of the ETFs I follow in the HPMR strategy would be wonderful for me and for my subscribers. We have all been waiting patiently on the sidelines for several weeks looking for the right opportunity to enter a trade. But, as I always say patience pays.

There are quite a few indicators that have pushed into bearish territory along with a few studies that I have looked at over the past few weeks.

One such study is from Nautilus Capital an institutional research firm that I find to be very savvy in the type of research they present. They recently stated that cyclical bull markets within secular bears have tended to average just 26 months, with an average gain of 85%, while cyclical bears within secular bears have averaged 19 months, with steep average losses of -39%. Market cycles tend to be truncated during secular bears, averaging a full bull-bear cycle duration of just 45 months (3.75 years), for a full-cycle average gain of just over 12% (3.3% annualized). Of course, fundamentals still tend to grow faster than 3.3% over the cycle, resulting in valuations that are lower at each bear market trough, even if prices are higher in absolute terms. I recognize that outcomes like these are unpleasant and inconvenient to contemplate, but denying the possibility doesn’t make anyone a better investor.

We are currently in the 26 month of a cyclical bull in a secular bear and I think the 39% drop is not too much of a push. A 39% loss would bring the S&P back down to close both of the gaps I discussed yesterday and would fall right in line with my prediction over the 9-12 months.

However, this wil lnot stop the HPMR strategy from making money. The strategy can make money in any type of environment and has proven so since its inception.

Healthcare is currently the only ETF that I follow in a short-term extreme state. The RSI (2) has also confirmed along with the other proprietary indicators that I use so subscribers be on the lookout for a potential alert tomorrow.

Have a great night!

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