The SPDR S&P 500 ETF (SPY) - Get Report , known as "Spiders" by active traders, set its all-time intraday high of $294.95 on May 1 but then came the China trade talks and continued quantitative tightening by the Federal Reserve.
The mantra "sell in May and go away" was presented on May 2 when I suggested that this strategy seemed workable in 2019.
Between May 5 and May 22, spiders traded back and forth around its annual pivot at $285.86 and Thursday's gap open below this level continued the bearish warning. The next key level to hold is the 200-day simple moving average at $277.39.
Reasons for Caution:
Tech stocks including semiconductors are getting hit by the China trade war. Bank stocks are lagging on worries about refinancing of corporate bonds. The energy sector is slumping as crude oil declines. Retail stocks are getting hit on concerns of increasing costs due to the tariffs.
Uncertain monetary policy is another concern as quantitative tightening continues. When the Federal Reserve unwinds its balance sheet, money is drained from the banking system. The Federal Reserve reduced its balance sheet by $27 billion during the week ended May 15, and the total for May is scheduled to be $35 billion.
On May 15 the balance sheet was marked at $3.865 trillion, down $635 billion since the end of September 2017 when quantitative tightening began. The unwind will not meet Fed Chairman Jerome Powell's stated goal of a $3.5 trillion balance sheet. It will be $190 billion short. This implies that additional quantitative tightening will be needed longer-term.
The Daily Chart for Spiders
Courtesy of Refinitiv XENITH
The daily chart for Spiders shows a bear market decline of 20.4% from the Sept. 20 high of $293.94 to the Dec. 26 low of $233.76. The technicals turned on a dime on Dec. 26 with a daily "key reversal" when the close of $246.18 on Dec. 26 was above the high of $240.84 on Dec. 24. This signal indicated that 2019 would begin as a positive market for stocks. The close of $249.92 on Dec. 31 was an important input to my proprietary analytics and semiannual and annual levels remain in play at $266.14 and $285.86, respectively. The close of $282.48 on March 29 was another input to my analytics and the quarterly risky level at $297.56 was nearly tested at the high. The April 30 close at $294.34 was the latest input to my analytics and the value level for May is $266.58.
The Weekly Chart for Spiders
Courtesy of Refinitiv XENITH
The weekly chart for Spiders will be negative if Friday's close is below its five-week modified moving average at $285.89. SPY is well above its 200-week simple moving average or "reversion to the mean" at $241.97 after this average held at $234.71 during the week of Dec. 28. The 12x3x3 weekly slow stochastic reading is projected to end this week at 78.26 down from 87.45 on May 17 falling below the overbought threshold of 80.00. At the May 1 high this reading was 96.14 above 90.00 threshold so Spiders were in an "inflating parabolic bubble" formation and this bubble is popping.
Trading Strategy: Buy weakness to the semiannual value level at $266.14 and reduce holdings on strength to the annual pivot at $285.86. Traders can buy weakness to the 200-day simple moving average at $277.38.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years. The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.