Market Heals Again, but Raise Stop Losses

09/27/2017 4:56 am EST

Focus: STRATEGIES

Jeff Greenblatt

Director, Lucas Wave International, LLC

Traders should not return to complacency. It’s still prudent to protect profits with stop losses and you may even be able to raise those stops with this latest sequence, says Jeff Greenblatt, director of Lucas Wave International and editor of The Fibonacci Forecaster.


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Markets are now halfway through these long-term cycle points and the technical situation remains decent. In recent posts, I’ve discussed divergences with the PHLX/KBW Bank Index (BKX)  as well as the Dow Jones Transportation Average (DJT).

Recently in the past week, the PHLX Semiconductor Index (SOX) came off the high. Even the NYSE Arca Biotechnology Index (BTK) became questionable. But with two trading days left in September, markets have dodged not a bullet, but a missile.


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Some of you can take that literally since we’ve spent weeks in hot rhetoric with North Korea. There were a lot of situations that could’ve gone wrong this month but didn’t.

First was the debt ceiling, where the can was kicked down the road for three months. Three hurricanes were a catastrophe and the economic fallout remains to be seen. In her statement to the world last week, Janet Yellen is concerned about future economic fallout. But not now, not today. Finally, even as Congress can’t get health care off the launching pad, it appears they may very well be able to do it with taxes.

Readers of this column know I’ve been very pessimistic about taxes, echoing the sentiments of David Stockman.

Once again, as Lord Rothschild recently stated, the world of politics appears to be colliding with the financial world. On Tuesday night, the voters of Alabama sent a message the populist wing of the GOP goes beyond the man they put in the White House. It is said the establishment spent over $30 million for Luther Strange. I’ve heard Judge Roy Moore spent about one-tenth of that and he won an impressive victory for the seat vacated by Jeff Sessions, now attorney general.

Why is this important to those of us who trade financial markets? Hope is now renewed that tax cuts will happen this year as the establishment realizes they won’t be able to buy their way into remaining a “do-nothing” Congress. If the leadership in Congress who promised a repeal of Obamacare for seven years doesn’t get the hint now, probably nothing ever will.

On Wednesday even the bank stocks recovered as did the SOX.

Transports are suddenly hitting another new high. Even the PHLX Housing Sector Index (HGX) hit a new high.

The Russell 2000 (RUT) also is looking better. Markets are not going to drop in a meaningful way when there are no major divergences. In most important tops, there are at least signs or clues something is not right.

If I must pour cold water on anything, CNBC reported new home sales fell to an 8-month low in August while realtors complained the pending home sales dropped 2.6% in August. “August was another month of declining contract activity because of the one-two punch of limited listings and home prices rising far above incomes,” said Lawrence Yun who is the chief economist for the National Association of Realtors.

This is not showing up in the HGX yet. From personal observation, the last time housing got in trouble it was July-August 2007 when numerous realtors in Arizona complained about pending sales falling out of escrow. We know the Russell peaked in July that year with the overall market peaking in October.

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So where does that leave the bears?  Sentiment remains incredibly complacent. Many indicators are at decade extremes or generational extremes.

In terms of social mood, the country remains as divided as ever: The latest episode being the NFL story. I’m not getting into the political debate but as a stock market person, this is not good for business. Ratings are down and Maria Bartiromo stated the advertisers are not going to pay for lower ratings. To prove the point, for the first time ever, DIRECTV offered full refunds for their Sunday Ticket product. Keep in mind Sunday Ticket is the flagship product for DIRECTV.

This is not the kind of behavior that hits markets all in one day, but has a cumulative effect. Traders and investors should not go back to complacency. It’s still prudent to protect profits with stop losses and you may even be able to raise those stops a bit with this latest sequence.

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