Here’s Why Capital Preservation is Still THE Name of the Game – Part 2

Click here for Part 1 of this post.

At Wednesday’s press conference, Fed Chair Powell reiterated the policy that Janet Yellen, to her credit, set in stone tablets in October of 2017. It should now be clear to one and all that, come hell or high water, the Fed intends to continue shrinking its holdings of Treasuries and MBS, unless there’s a “material adverse event.”

Powell has previously stated that such an event would need to be something that causes a real economic contraction, not just a bad stock market. It means that the Fed will keep shrinking its balance sheet, not only until the market has an accident, but until the economy has one as well.  

It means that the stock market will get much worse before it gets better.

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And the recent rally in Treasuries, driven by the panicked rotation of cash out of stocks and into supposedly safe Treasuries, isn’t long for this world either. Do not be tempted to chase the rally in longer term Treasuries. Keep rolling over holdings of short term T-bills until there are indications that the Fed will finally reverse course.

In the meantime, if you are not out of stocks, I don’t think it’s too late. I would aggressively lighten up on any rallies. One is coming to a theater near you. The question is when and from where it will come.

The Major Market Top Is Now Complete and It Suggests Where The Market Is Headed

The major market top pattern that has been forming for more than a year is now complete. We now have enough data to make a price projection for a low. It may not be THE low, but at least a low for a tradeable bottom. It’s a point at which we should stop buying puts and look at buying a few calls.

Conventional technical analysis teaches that we can project the likely extent of a down move by measuring from the peak of the preceding bull move to the point of the breakdown. The S&P had a high close in September of 2931. The baseline of the now complete top pattern was at 2533. So lets just round off the height of the top pattern to 400 points. Subtracting that from the baseline of 2534 would project to around 2130-35. 

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I think that is a way off. There will be interim rallies, and one may be close. JM Hurst, the founder of modern stock market cycle analysis used centered moving averages to project likely turning points. These apply over a variety of cyclical time frames.

I have found that one time frame useful for swing trading is the 6 month cycle. It has been less apparent than usual lately, thanks to the real, fundamental pressure of diminishing liquidity. The time for a 6 month cycle low has come and gone, but a Hurst 6 month cycle projection points to a low of around 2500. The market barely took a breather at that level on Wednesday and Thursday.

That level was also the locus of a lower parallel trend channel line. So there’s a basis for expecting at least a short term rally here, but only if the S&P can stay close to 2500. At this point late on Thursday, that’s highly questionable. A weak rally, or no rally, would suggest that the next stopping point should be a current one year cycle projection of around 2330.

Regardless of Where Rallies Originate, Their Purpose for You Is the Same.

With the ultimate target of this bear market likely to be significantly lower, I’d use any rallies to lighten up on any remaining long positions you might have.

I would continue to use rallies for buying, holding, and rolling over at the money puts on the SPY with about 4 weeks till expiration. Buy them when the market approaches a resistance level on the chart. Sell half when the market approaches support and roll the rest. Right now, the market is near trend support, so it’s a good place to take some profit.

Keep mental stops just above chart resistance on the S&P 500 or SPY itself. 

And because options can go to zero when the market goes against our bet, traders should limit the size of their option purchases to no more than they are willing to lose. The purpose of options trading is to profit while limiting risk! Practice prudence and patience for longer term payoffs.

Several of our gurus here at MMP offer research services that do just that. Chris Johnson’s Night Trader is one with an excellent track record in this bear trend. Click here to learn more about how you can profit from his service! ”

Finally, I want to wish you and your families the merriest Christmas and happiest of New Years. Your interest in my work has meant the world to me, and I thank you for that gift. I’ll see you a couple of times over the holidays!


Lee Adler

4 Responses to “Here’s Why Capital Preservation is Still THE Name of the Game – Part 2”

  1. Lee, thank you for all of your wonderful knowledge in 2018. All of it has been beneficial and it will help us all make good decisions in 2019 and beyond. This market is either beginning a bear now or sometime in 2020. We should know in the first 60 days of 2019. Have a Merry Christmas and a Happy New Year. Looking forward to your knowledge next year. Thank you!

  2. Lee, you have convinced me! I subscribe to 15 financial newsletters and watch Fox Business News and CNBC and you are the only one who provided the unique, behind-the-scenes, look at what is really affecting the Markets. No one else addressed the impact that reduced liquidity would have. I was somewhat skeptical but still lightened my positions (not to 60-70% cash) but did take significant gains from past market highs. I understand that calling the exact timing is impossible, but your advise has proved correct. Thank you, Lee, for your advice and for sticking with what you believe.

  3. Dear Lee, I would like to thank you for your guidance and analysis of the market. Your commentary of the shenanigans the mascerade of the so called experts of Wall Street is superb. I encashed 100 % of my portfolio in June and realised a 16% gain. After following your advise on the FEDs master plan of “normalisation ” As I hold a global portfolio of funds UK, European China, American, and specialist areas. However, I believe that the worlds markets follow the money therefore, they follow the S&P and Nasdec and American setiment. I remain poised and ready to invest at the appropriate time and very much look forward to your analysis and considered opinion in 2019. I wish you and your family a peaceful Christmas and health and happiness in the New Year. Greetings from Scotland.

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