Newsletter of Danny Merkel - Issue #137
Market Review:
I really enjoy spending time each day reading books; I recently read Astrophysics For People In A Hurry by Neil DeGrasse Tyson and that book begins with the line:
The Universe Is Under No Obligation To Make Sense To You.
Along the same lines, it’s important to remember that the stock market is under no obligation to trend for you.
Referring to the chart below, we can see that the DJIA is flat going back 30 months now:
To be more precise that index is down 1.16% over the past 30 months. That’s an indisputable fact.
I guess you could dispute that the above chart doesn’t include dividends, which is true; however my counterargument would be that it also doesn’t include inflation. How much has the CPI risen during the past 30 months?
Also, while it is true that the market reacted very positively to negative news on Friday, the bigger picture remains the same: this is not a healthy bull market.
Another unhealthy sign is that market breadth has been collapsing.
This next chart shows that as QQQ was rising this summer, the majority of the components inside the ETF were not:
As it stands now, only about 25% of Nasdaq components are trading above their 200 day moving average.
In other words, the vast majority of stocks - 75% - are trading below the 200dma.
With so many individual stocks in downtrends, how is it possible that the index itself has been so strong this year?
The answer, of course, is that they have become extremely top-heavy with only a few mega-tech stocks comprising more and more of the index.
In fact, the S&P 500 is more top-heavy today than any time in history going back 43 years.
Given that the indexes are so concentrated and given that all of these big-tech giants are correlated to each other, the S&P 500 has become increasingly vulnerable to a vicious gap down.
In my opinion, SPY will likely experience a 5 - 10% overnight gap down at some point in the future.
Interesting ETFs:
From a risk management perspective, I’m totally against the lack of diversification found in QQQ.
Trend-Following trading involves making small bets - both long and short - across a diverse range of asset classes.
Fortunately, getting exposure to this time-tested strategy has never been easier.
With a click of a mouse, one can buy into a variety of Trend-Following ETFs such as,