Would the Perfect Indicator Make You Euphoric?

The Market

No indicator is perfect. Or as I am fond of saying, when you find that one indicator that is right 100% of the time I do hope you will let me know, because I surely would covet it.

I am a big fan of the Citi Panic/Euphoria Model. The main reason is that I believe over time it has been a good guide for the markets. Is it meant to time the market perfectly? Gosh I wish it were.

Sometimes it is perfect and other times it is weeks early – both on Panic and Euphoria. Two examples are that it tagged Euphoria in early August 2018, but the market did not make its high until the first week of October. Another is that it tagged Panic the first week of December 2018, but the market did not make its low until Christmas week.

In 2018, this indicator tagged Euphoria at that black arrow in August, but it was the red arrow when the S&P made the high. Look at it in combination with the McClellan Summation Index. It was heading down in August – it is not doing so now. It enjoyed a failing rally in late August but look at the red arrow which pretty much tells you how things were heading into that fateful high in October.

Remember how euphoric the market felt in December -– and yet this indicator refused to move up and instead it dipped? It did not tag Euphoria until mid-January. It dipped and tagged it again in mid-February. The S&P dipped in late January and then re-rallied 5%. I look back now and am reminded that my mentor in this business used to say if the Market Gods tapped you on the shoulder and told you we were within 5% of the high, you’d sell everything.

Or inspect the way it got to Panic in early September, but the market was already on the move up by then, having almost tagged Euphoria in late July and collapsing into late August. The curious part in that episode was the S&P rallied 6% in early September, only to come right back down into early October. Now look at the indicator: It cared not a whit about that 6% rally, it preferred to hug the Panic line.

This is not a perfect indicator, but it remains a solid guide to sentiment and this past week it tagged the underside of Euphoria. I would be much more cautious on the market if the indicators were rolling over instead of just overbought, but at the same time I cannot ignore this sentiment indicator.

Here’s the way I will use it this time. The first sign of the indicators rolling over will move me toward a much more cautious stance. At this point in time all we have is a market that is overbought.

How do I reconcile this with the (now very much an outlier) AAII survey from last week? I still can’t rationalize it, so I won’t try. But we can all agree that if there is Euphoria in the market, it is in tech-land. That caused me to take a look at the chart of the Equal Weight S&P relative to the PowerShares QQQ Trust (QQQ:Nasdaq).

It surprised me that this ratio, which tells us that the equal weight S&P has been pretty bad relative to the QQQ through mid-March, but since mid-March, while not outperforming, is at least holding its own. Any sign that this ratio breaks this triple-bottom and I suspect those indicators of mine will roll over. I am willing to give this a chance to rally, but the leash will be a short one, especially since I still think we’re overdue for a bout of volatility.

New Ideas

I keep waiting, not so patiently, for Schlumberger (SLB) to fill this gap and every time it gets up here it fails to do so. As long as it stays over $16-ish it gets the benefit of the doubt in my book.

Today’s Indicator

The New York Stock Exchange saw no increase in stocks making new highs, but Nasdaq saw an uptick. We have not seen an uptick in stocks making new lows yet. But that would be another sign the indicators are failing if it were to happen.

Q&A/Reader’s Feedback

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I am not a fan of stocks with spike highs because those spikes tend to be resistance as trapped longs search for the exit doors. I suspect Quest Diagnostics (DGX) rallies again but finds resistance over $115 as that spike high becomes an issue. If it were to go sideways for several weeks I would begin to discount the spike resistance as minimal because time has passed but when it is this close it is often an impediment.

Lab Corp of America (LH) is similar to DGX but it has two prior spike highs that it has failed underneath. A sideways move from here would get me more interested. Right now I think if the stock can rally back to that $180 area I’d sell it.

Stryker (SYK) is trying to eat its way through resistance. A good rule of thumb is that if it took six months to build the top it probably takes something close to that to eat through it. That means the $200-$220 zone should be resistance while it tries to eat through it.

I suppose if you wanted to buy an airline United (UAL) would at least offer a decent risk/reward since if the stock trades under 22 you know you should bail out pretty quickly. And resistance is not until just over 30.

USX-US Steel (X) isn’t a bad chart. It has taken rests along the way and now if it gets through $9 it would be a mini breakout—emphasis on mini! Use a stop under $8.

Bristol-Myers Squibb (BMY) is another one of those drug stocks that I think needs a shakeout and has become somewhat overloved and overowned. I am not quite sure where it can come down to but a break of $60 would be problematic.