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Chris Lau

Hold 100% Cash

This is relevant to momentum.

I was rafting a river in Arkansas on October 19, 1987. I was hurt bad by Black Monday, but recovered my losses within a year. I don't believe that history repeats, but you often see it rhyme.

There are parallels today to the week before October 19, other than it being the same month.
The economy was doing great in 1987, short-term interest rates were rising, and long-term rates suddenly accelerated that October. The 30-year T-bond yield actually peaked on October 19th at 10.25%, which is out of sight compared to the current yield, but then stocks are much more highly priced than then. The dividend yield on the Dow had just dropped below 3% for the first time that year.

The S&P 500 peaked on 8/25/1987, fell and rallied in September to early October. On 10/14 (Wed.) it fell 3.00%. It fell 2.4% on 10/15, and then 5.2% on the Friday. I think it was on the Friday that it fell below its 200-day moving average. I know that portfolio insurance strategies supposedly provided the momentum for Black Monday. The fact that the indexes fell below their 200-day MA on the Friday was rarely mentioned. But I know that many pension funds were advising clients to sell when that happened.

Today the S&P has dropped below its 200-day MA. If it closes well below that level, I think that makes Friday and/or Monday very liable for a major crash. Remember Black Monday was preceded by three large down days, but two might do it given that the 200-day MA has been breached. If it does crash, buy T-bond ETFs that day. You could also buy big caps. They had a double bottom in the next month. The Russell 2000 didn't hit bottom for about 6 more weeks.

If this comes true, I guess I will get a lot more followers. No pain if I'm wrong. But what value investor would be buying at these still elevated valuations? There is no blood in the streets. And what trader in their right mind buys a falling knife? Even mean reversion traders wait for some bounce, don't they?

Financial stocks are doing badly. International equities and bonds are doing badly. China is down how much on the week? - a lot. Commodities other than gold are down. Looks like a downward vortex to me. I'm 100% in cash.

This post via The Social Scientist.

Below, $SPY gains since July 2018 erased. Gone. Poof.

$SPY, SPDR S&P 500 / H1