About a week ago, our indicators told us “supply” was now in
control of the market.
What happens to prices when there is not enough “demand” and too much “supply” of something?
Prices must fall. So we should focus on protecting money.
Moving to defense doesn’t mean that the market will go straight down. It IS possible to make money in this market, but we’re facing a strong headwind.
This indicator doesn’t tell us how high the market will go — or how far the market will drop. It tells us the risk level. And it’s telling us the risk in the market now is higher than it has been in the last eight months.
As one of my clients wrote in an e-mail, “I guess it’s better to play it safe, then to lose big.”
Couldn’t have said it better myself.
After a big week down, we usually get a “reflex rally,” which is what we’ve seen the last few days.
The indicator moved to defense in April 1987 — four months before anyone started to realize there might be a problem. It also moved to defense in June 2001, well before 9/11. Investors who followed these signals had a large amount of money on the sidelines, before trouble began.
The indicator has also gotten us out of the market other times too. Twice in 2004, the indicators went to defense, and the market went nowhere during that time. But we didn’t lose money by becoming defensive during those times. We just happened to be on the sidelines while the market did nothing. I’ll mention more about this in my next message.