Timer Stays on “Sell”

10/15/2014 9:00 am EST

Focus: ETFs

We remain on our July 31 sell signal, expecting a significant correction (15% to 20%) to a low in the October-November time frame, cautions Sy Harding, timing specialist and editor of Street Smart Report.

We are coming into the 3rd quarter earnings reporting period. Added to concerns this time is the surging US dollar, which will cut into reported earnings of US corporations with significant international operations. (Their profits in foreign currencies translate into fewer dollars when the dollar is rising in value).

As usual, Wall Street firms are lowering their forecasts to make it easier for companies to 'beat Wall Street's estimates.' But there are more and different questions this time around.

With almost 50% of S&P 500 revenues coming from overseas, how much will the spiking dollar have impacted earnings?

Earnings per share have also primarily been driven by a very high level of share buybacks, a hot topic in the first half. But did they taper off in the third-quarter to a degree that will impact earnings?

With a market overvalued by most methods of measurement, (P/E ratios, Price/book value ratios, Market-cap to GDP ratios, etc), we have global economic slowdowns and market declines finally catching the attention of US investors. And a period when an already overvalued market may become more so if 3rd quarter earnings disappoint.

We do not expect a bear market, but anything is possible if investors, who have not seen even a 10% pullback since 2011, should panic. If so, our positioning for a correction will have us also positioned for something worse.

We expect a buy signal and sizable rally for the next favorable season and probably through next year, the odds for which will be better if we get a significant correction now to cool off the valuations.

We will be aggressively bullish once the market's favorable season begins, since the history is for a significant rally from the low in the 2nd year of the Presidential Cycle, and the 3rd year of the cycle is the most positive.

Bonds fooled the experts in the first eight months of the year. It was supposedly a sure thing that bonds would plunge when the Fed began tapering back its QE bond buying in January.

However, as the stock selloff became more pronounced, bonds rallied back, being sought as a safe haven. And that has produced enough upside momentum reversal to trigger a new buy signal.

We do not expect this to be a long-term holding, but another holding for our expectation of a significant stock market correction to a low in the October/November time frame.

Our portfolio's current positioning is, therefore, 10% in the inverse ProShares Short Dow ETF (DOG), 10% in the inverse ProShares Short Russell 2000 ETF (RWM), 20% in the ProShares Short QQQ (PSQ), 20% in the iShares 20-Year Bond ETF (TLT), and 40% in cash.

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