“I listened very, very carefully to the world around me to pick up the signals of when trouble was coming. Not that I could stop it. But it made me observant. That was helpful when I became a lawyer, because I knew how to read people’s signals.” ― Sonia Sotomayor, Associate Justice of the Supreme Court of the United States
“Remember always that everything you know, and everything everyone knows, is only a model. Get your model out there where it can be viewed. Invite others to challenge your assumptions and add their own.” ―Donella H. Meadows, lead author of The Limits to Growth and Thinking in Systems: a Primer
As the US stock market has rallied and reached new heights, we have been trying to develop a framework that can provide a timely signal to reduce exposure. At the same time, we also want said framework to provide a timely signal to increase exposure following a draw down in the market.
In today’s piece we share one tool that we hope will, eventually, form part of a larger market timing framework. This piece is word light, chart heavy with the same tool being applied to major indices, select sector ETFs, and individual securities to provide indicative buy and sell levels can help us preempt sharp draw downs and avoid missing out on sharp rallies.
If you would like us to apply the tool to any additional securities just email us and we would be happy to do so.
Greed & Fear Gauge
The tool is really quite simple. It is a leading indicator created by deducting the 100-week moving average from weekly close prices and then identifying key buy and sell levels based on the indicator.
The key buy and sell levels are meant to act as guide, allowing some room for discretionary judgement if one prefers, rather than exact levels to trigger decisions. While there is some friction from whipsawing around key levels, a non-discretionary approach to the key levels can work well too, in our opinion.
In each of the charts presented below, there are twenty-five, the magenta line is the indicator and the orange line is the weekly close prices of the index / ETF / security in question.
Major Indices
S&P 500 Index
The key levels are indicated using the black horizontal lines on the chart above.
The upper bound should be used as follows:
- If the index has a weekly close at or more than 350 points above the 100-week moving average for the index, the sell trigger is a weekly close that is less than 350 points above the 100-week moving average.
- If the index recovers the 350 points threshold on a weekly close at a later day, long positions should be re-established.
The lower bound should be used as follows:
- If the index has a weekly close below the 100-week moving average of the index, any remaining long positions should be closed out.
- If the index moves back above the 100-week moving average, new long positions should be initiated.
For the remaining charts we will identify the upper and lower bound levels and the same explanation as above will apply but replacing the respective upper and lower bounds for the ones for the S&P 500 Index.
Nasdaq 100 Index
Upper bound: A weekly close 1,000 points above the 100-week moving average.
Lower bound: A weekly close below the 100-week moving average.
Nasdaq Index (Broader)
Upper bound: A weekly close 1,000 points above the 100-week moving average.
Lower bound: A weekly close below the 100-week moving average.
MSCI ACWI
Upper bound: A weekly close 50 points above the 100-week moving average.
Lower bound: A weekly close 25 points below the 100-week moving average.
Emerging Markets $EEM
Upper bound: A weekly close $10 above the 100-week moving average.
Lower bound: A weekly close $5 below the 100-week moving average.
Nikkei 225
Upper bound: A weekly close 3,000 points above the 100-week moving average.
Lower bound: A weekly close 150 points below the 100-week moving average.
MOEX Russia Index
Upper bound: A weekly close 400 points above the 100-week moving average.
Lower bound: A weekly close below 100 points above the 100-week moving average.
Sectors
PHLX Semiconductor Sector $SOX
Upper bound: A weekly close 100 points above the 100-week moving average.
Lower bound: A weekly close 35 points below the 100-week moving average.
Energy $XLE
Upper bound: A weekly close $5 above the 100-week moving average.
Lower bound: A weekly close $10 below the 100-week moving average.
Utilities $XLU
Upper bound: A weekly close $5 above the 100-week moving average.
Lower bound: A weekly close below the 100-week moving average.
Pharmaceuticals $XPH
Upper bound: A weekly close $5 above the 100-week moving average.
Lower bound: A weekly close $5 below the 100-week moving average.
Retail $XRT
Upper bound: A weekly close $3 above the 100-week moving average.
Lower bound: A weekly close $1.25 below the 100-week moving average.
Consumer Staples $XLP
Upper bound: A weekly close $5 above the 100-week moving average.
Lower bound: A weekly close below the 100-week moving average.
Healthcare $XLV
Upper bound: A weekly close $12 above the 100-week moving average.
Lower bound: A weekly close below the 100-week moving average.
Biotech $IBB
Upper bound: A weekly close $10 above the 100-week moving average.
Lower bound: A weekly close $5 below the 100-week moving average.
Individual Stocks
$AAPL
Upper bound: A weekly close $30 above the 100-week moving average.
Lower bound: A weekly close below the 100-week moving average.
$MSFT
Upper bound: A weekly close $30 above the 100-week moving average.
Lower bound: A weekly close below $10 above the 100-week moving average.
$SBUX
Upper bound: A weekly close $10 above the 100-week moving average. Given the strongly rally recently, however, we add $20 above the moving average as a profit-taking trigger.
Lower bound: A weekly close below the 100-week moving average.
$GOOG
Upper bound: A weekly close $225 above the 100-week moving average.
Lower bound: A weekly close below $50 above the 100-week moving average.
$NKE
Upper bound: A weekly close $18 above the 100-week moving average.
Lower bound: A weekly close below $5 above the 100-week moving average.
$AMZN
This is a difficult one given the strength of the rally in the last three years and probably provides a weak signal.
Upper bound: A weekly close $600 above the 100-week moving average.
Lower bound: A weekly close below $200 above the 100-week moving average.
Micron $MU
Upper bound: A weekly close $15 above the 100-week moving average.
Lower bound: A weekly close $5 below the 100-week moving average.
Precious Metals
Gold
Upper bound: A weekly close $250 above the 100-week moving average.
Lower bound: A weekly close below the 100-week moving average.
Silver
Upper bound: A weekly close $5 above the 100-week moving average.
Lower bound: A weekly close $1 below the 100-week moving average.
Bitcoin
Upper bound: A weekly close $5,000 above the 100-week moving average.
Lower bound: A weekly close below $1,000 above the 100-week moving average.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.