Correction or OPEX Shenanigans?

The market began selling early again today, but this time dip buyers were unable to mount a reversal.

The selling appeared to begin in Europe, where news came that eurozone officials may suspend fund payouts to Greece unless the country agrees to additional austerity measures. This situation has seen so much back and forth political posturing that the market is now concerned further gridlock may ensure a Greek default.



Here at home, a preliminary reading on consumer sentiment showed a drop from 75.0 in January to 72.5 for February. Also reported was the January Treasury deficit, which fell hard to 27.4 billion; almost half the amount posted the previous month. The December trade deficit was up by $1.7 billion to $48.8 billion.

The charts took a hit today. Let's look at the damage:



NAMO and NYMO fell sharply on today's action and are now both in negative territory. Both remain on sells. I had mentioned yesterday that these two signals had me concerned even if the others were still relatively unchanged.



NAHL and NYHL also dipped and are in sell conditions.



TRIN and TRINQ both flipped to sells. Neither is suggesting an oversold market by this measure, so follow through to the downside is a good possibility.



BPCOMPQ dipped for the first time in weeks, but it stopped just short of triggering a sell signal. It doesn't get much closer than that.

So "technically" the Seven Sentinels remain in a buy condition, but only because BPCOMPQ remained a hair's width away from flipping to a sell. That's not very reassuring if one is a bull.

Given that NAMO and NYMO were looking bearish to me yesterday and given the way our market opened after significant losses overseas, I decided to move the Seven Sentinels into a 50/50 G and S position at the close of trade today. I could not be sure the dip buyers would turn this market again and I also couldn't be sure a sell signal would indeed be triggered, but I felt risk was high enough to warrant a more defensive posture.

At the moment I am comfortable with that position and will decide Monday whether to move to 100% G fund or not. For several reasons. First, I'd like to see BPCOMPQ make a more decisive move lower and actually trigger a sell. Second, it was only one day of selling and I'm not so sure momentum to the upside will be extinguished so easily. Third, next week is OPEX and today's action could have been pre-OPEX positioning by the big boys. Fourth, the week of OPEX tends to be supportive of market prices even if volatility is present.

So it's not a slam dunk that the selling pressure we saw today will lead to significant losses in the short term. Or that we won't recover relatively quickly and resume the upward bias.

For now I'm just going to wait and see how Monday plays out before I commit to taking a more defensive posture.

Stop by Sunday evening when I'll have the Tracker charts posted. See you then.

 

[Guest]

I know the 7S's are your making but I was under the impression that they follow the system. Moving 50/50 struck me as a "changing the rules" type move? Shouldn't they stay invested until a sell signal is received? Otherwise it seems we won't get a true gauge of how the 7 S's system actually preformed.

 

[coolhand]

I know the 7S's are your making but I was under the impression that they follow the system. Moving 50/50 struck me as a "changing the rules" type move? Shouldn't they stay invested until a sell signal is received? Otherwise it seems we won't get a true gauge of how the 7 S's system actually preformed.

Fair question.

I have thought about that for quite some time and I didn't take this action lightly. Here's my reasoning. Our funds are not in a brokerage account where we can control them at a higher level. I can't set stops, I can't move after 1200 EST, I only have 2 IFTs each month, etc. Those are very significant limiting factors. As it is, when the system gives me a signal, it still takes us at least one more full trading day to get out. In a market where the indexes can move several points in just two days, that lag time can significantly impact actual performance. That's unacceptable to me. The system wasn't designed to have handcuffs placed on them so actual performance is already skewed.

I have also decided to leave it up to each individual how they want to use the system. It is a tool, nothing more. It offers no guarantees, just like the market. I would like to think that between the Seven Sentinels and a bit of market savvy, I can help reduce risk and somewhat offset the limitations we have in the TSP.

I have been able to successfully "front-run" the signals on a number of occasions in the past. I don't like doing it, but we're talking about money here.

I've been using this system long enough now to recognize when risk is rising. The volatility this market put us through last year whipsawed the system badly and it ended up with more than a -12% loss for the year. Most of that was during the July/August swoon. Prior to that I had stopped following the signals in lock step and began using it as a guide instead. I managed to have a modest gain last year instead of taking those heavy losses.

So it's not just the system. It's the interpreter too.

Regardless of which way I go there will be times when I'll be wrong, but there will also be times when I am right. Hopefully, I'm right more often than not.

 

[Guest]

I couldn't agree more that this departure from the 7 Sentinals was poor form, would rather had seen a new system altogether, maybe "Coolhand's Investment Advice" or something. I check the 7 Sentinals every day as a source of stable and consistent evaluation, a guage I could evaluate from, like an Index as opposed to a Investment advice... and I enjoy reading Coolhands analysis to boot. BUT, he just changed the rules in the middle of the game and unfortunately and the 7 Sentinals are no longer a system that I can reference and KNOW where they stand, it's now a brokerage account subject to the will of the "fund manager" and if you miss a week you can no longer be sure what the 7 Sentinals stand for... were the 7S's supposed to be a buy/sell signal system derived from constants... or are the 7S's now Coolhands personal brokerage system? From another perspective, let's say a new member begins to follow the 7S's and all he/she really knows is the charts and where the 7S's stand on the Autotracker, then Coolhand makes an unexpected front move and presto, he/she suddenly realizes that the Autotracker IS NOT a reflection of the 7 Sentinals. Sorry CH, IMO, in your desire to predict the charts and make advance moves ahead of your actual signals, you really missed on this one - the 7S's are no longer an accurate index or guage, it's just another personal investment strategy... dime-a-dozen.

I know the 7S's are your making but I was under the impression that they follow the system. Moving 50/50 struck me as a "changing the rules" type move? Shouldn't they stay invested until a sell signal is received? Otherwise it seems we won't get a true gauge of how the 7 S's system actually preformed.

 

[coolhand]

Look folks. Let me ask you all a question. If you follow a system, any system, does that mean risk management no longer applies?

That's not a trick a question. And what is the value of market savvy?

If you think there is some holy grail of trading systems out there that will always keep you safe you're kidding yourself. I understand the perspective of the question that was originally asked, but the answer is not a simple one.

I believe this is first time I've used risk management when it comes to the Sentinels in about 2.5 years so it's not something I'd execute often.

 

[coolhand]

Delete

 

[Boghie]

If you want to track the system directly just note whether it has assets in the the 'S Fund' or not. If it is split, look at the commentary. You should be reviewing the charts anyway before making a move.

Plus, and actually more important, CH is right regarding this or any 'system' when used in a TSP account. The Seven Sentinals system is built to trigger a minimal number of trades per month. Whether that be no trades, one trade, two trades, or a bit more. The 'bit more' is also an issue when using 7S as a TSP trading system. The fact that 7S could trigger when just about everyone can actually make a trade - but we cannot - is an issue. Who else is limited to a 1200 time of day limit - that is so 1980s. That limit in itself causes up to an 8hr delay in implementation of the systems recommendation.

All CH is really saying is that as of trading deadline (1200 on Friday rather than 1600 on Friday) everything pointed to a 7S trade. As it stood the 7S hung onto an equity position. Thought of this way CH had to make an assumption based on the trend four hours before the signal would or would not be made. Had CH been able to implement 7S signals in TSP at 1500 things might have been different. But, maybe not. A 50/50 split is a fine representation of what 7S is stating - is it not?

Anyway, CH, I saw the split holdings and figured it out even before the post. Too bad I was being pounded at work. Oh well...

 

[coolhand]

You are correct Boghie. I was smelling a sell signal based on what I saw happening to the signals. But i didn't go all out and front run the signal, rather I simply reduced risk until it became clear whether a signal would be produced or not. And it came pretty darn close to triggering too. NAMO and NYMO are now screaming sell with BPCOMPQ teetering on one.

I am currently reading Rev Shark's book "Invest Like a Shark". One of the things he tells readers is that if something isn't looking right and you know it, don't hesitate to sell. I didn't like where I saw the signals heading so I split the allocation until things got more clear. If Monday is down and the system triggers the sell, I'll move the rest into the G fund. If the sell doesn't come, I'll move it back into S.

I'd like to use my blog for more than just demonstrating a system. I've been doing that for more than 2 years now. We've seen its limitations.

The lesson here is that if the market is showing signs of deterioration and a given system confirms it, the trader may want to reduce risk until the situation resolves itself.

I'd like to make one more point. Emotional trading is not the same as risk management. One should never confuse the two. I had some very good basis for why I did what I did and I spelled it out in the blog. I leave it up to the reader whether they want to agree or not. Risk is not the same for everyone.

For what it's worth, the trader who I learned this system from is also applying risk management to this system and has been for a little while now. It's a valuable tool just like the system itself.

 

[RADAR62]

I'm new to tsp talk but I've been in the tsp for a long time managing my funds. I agree with you that investors should not rely on one system but take all the info available to make a rational choices involving which funds to allocate funds to. Looking at how some fund participants allocate their funds, and knowing how far this rally has run, it seems profit taking should have taken place a week or so ago. I took my funds out of the stock funds last week selling on an up day and waiting for a correction which seems inevitable according to the charts you post every day. Thanks for the postings every day , appreciate it.