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A Break from Tradition
AT A GLANCE: The Goodman Price/Volume Stock Selection System (GPS) has selected the first two buys for the GPS NASDAQ 100 Portfolio. Price/Volume Charts turned clockwise and can produce buy signals in the next two sessions if there is a rally today and tomorrow. Three neutral indicators turned negative giving us 17 in all -- just two more to the negative side, and the stage will be set for a Quick Summary Index buy signal when the number of negative indicators drops back to 16 or fewer. The Smart Money Indicator has turned decidedly negative and has given a sell signal. The Goodman Price/Volume Stock Selection System (GPS) has selected its first two buys from the NASDAQ 100:
There were no buys or sells within the S&P 100. All of the open buys in each of the two indexes are listed every day in the two online model portfolios -- the GPS S&P 100 Portfolio and the GPS NASDAQ 100 Portfolio. You can see them by clicking on the links that appear in the box at right. For example, today's two new trades will appear in the GPS NASDAQ 100 Portfolio. In Wednesday's report I discussed at some length how I personally trade the buys and sells selected by GPS. I set aside the total sum of money that I wish to use for this trading system and then apply 1% to each new buy. In that way I can buy a total of 100 stocks from those selected in the NASDAQ 100 and the S&P 100 systems. And, since I do my trading in a margin account, I am able to hedge the long positions with short positions in SPY and/or QQQQ (GPS does not select individual stocks for selling short). I will hedge at my discretion, such as when the Summary Index is flashing a sell signal and the Trend Indicator is not in an Uptrend. The net level of equity exposure achieved by that hedging will generally match the level I set in the third of the three GPS online model portfolios -- the Discretionary GPS Portfolio, which is also linked in the box above every day. That equity exposure also generally match the equity exposure in our original online model portfolio, the Discretionary Technical Portfolio (it, too, is linked in the box above every day). This technique suits me just fine, but there are many ways of using GPS -- ways that may better serve your needs. For example, perhaps you are skilled in fundamental analysis, or you have a market letter or service that provides you with stocks selected based on earnings, earnings growth, changes in business models or any of a myriad of factors. Then you can us GPS as a technical analysis "second opinion" to screen stocks that you already like on a fundamental basis. Now suppose you don't want to own as many different stocks at one time as GPS selects. I showed in yesterday's report that, in the most recent six-month period, about two thirds of the GPS buys were winners, and the average profit was about twice as large as the average loss. That means that your results could have varied significantly depending on which of the stocks you happened to choose to buy, and which you chose to ignore. The number of stocks you choose to buy will be one of several factors that will make your performance using GPS different than that of our online portfolios. Even if you buy them all, their relative weighting could give rise to differences, too (I assume that all positions are held in approximately equal weight). Another factor is the portfolios trade at the close on the day each buy is selected by GPS, but anyone trading based on GPS could get a different price the next day -- maybe better, maybe worse (this week, anyone buying GPS stocks probably did very much better the next day, as stocks have been generally falling). And don't forget that you pay commissions, which we ignore in our model portfolios. But on the plus side, you will receive dividends from the stocks you hold, which are ignored in the model portfolios. I've gotten a number of questions from readers about the way I present the holdings in the GPS S&P 100 Portfolio and GPS NASDAQ 100 Portfolio. Readers have noted that these portfolios hold no cash -- that is, they are always fully invested -- and wondered where does the money come from when it's time to buy a new stock. The answer is simply that we treat these portfolios like mutual funds that receive new money from shareholders whenever there is a new stock to buy -- and the new money is used entirely to buy the new stock, in approximately equal weight to all the positions already in the portfolio. Similarly, whenever a stock is sold, the portfolios act like a mutual fund that returns the sales proceeds to shareholders. So if you were to think of your own GPS trading as happening in a mentally separate account in which you can constantly inject and withdraw money, then your actual trading could generally follow what I'm doing in the two portfolios. The third GPS portfolio -- the Discretionary GPS Portfolio -- buys "shares" of the two other portfolios and will occasionally hedge them with short positions in SPY and/or QQQQ when my timing indicators suggest that the market is likely to be weak. It's presented in a much more straightforward way, based on a fixed number of dollars in the account. More about the GPS tomorrow -- I hope you will keep your emails coming since they help me determine what needs to be discussed further. As I'd been expecting, the market broke away from the 1999/2000 holiday parallel on Wednesday when the decline was extended on lower volume, rather than advancing on higher volume as it did in the early days of 2000. Actually, by doing so there is now a greater chance that a sustainable rally will follow. Three indicators moved from neutral to negative yesterday, giving us 17 negative, 9 neutral and 3 positive indicators. If two more indicators move to negative, the total will reach 19 -- the threshold for a Quick Summary Index buy signal which will occur when the indicators return to 16 or less. Also, the Summary Index fell to 9.8 yesterday, and will be at 6.1 in a week if there are no further changes by the indicators. If there are further declines, the SI will drop below the buy signal trigger level at 4.5 and will produce a buy signal when it moves back above that level. The Trend Indicator moved up to 12.73 and the Uptrend continues.
The S&P 500 200-day moving average reached 1130.25 Wednesday and the 50-day moving average closed at 1179.97. The shorter average will reach 1181.42 today if the S&P 500 closes unchanged. Since I anticipate at least a bounce off the 50-day average, and the S&P 500 stands just two points above that level, today has an excellent chance to provide that bounce. I continue to look for a rally in the first quarter of the year, but I will certainly protect my long positions if the support offered by the 200-day average is penetrated. However, the Summary Index is getting into position for a buy signal and that may save us from penetration of support.
The S&P 500 14-day Relative Strength Indicator (RSI) penetrated the important 40% level on Tuesday, and then continued its decline to 34.6% on Wednesday. Look for an upmove today and tomorrow since two negative days are dropping out of the calculation. However, next week there will be four positive days dropping out so there may be renewed pressure on the indicator, just as there was last March after an initial bounce.
The S&P 500 Price/Volume Chart fell on lower volume. It has thus positioned itself so a low volume rally today and a high volume rally Friday will produce a basic buy loop.
The NASDAQ Price/Volume Chart is in the same situation. Because of the low volume decline, a buy loop may now be produced by following the orange and green arrows.
The Dow Price/Volume Chart has the same potential even though the decline yesterday was accompanied by a small increase in volume.
As you see, we have departed from the close mirroring of the 1999/2000 holiday season, when the Dow fell rather than advanced yesterday. While it couldn't last forever, it is still possible that the buy loop mentioned above will be completed and will provide a better followthrough rally than occurred in January 2000.
Gold has fallen sharply since our completed and confirmed continuation sell loop on December 29 and 30. While it can complete a clockwise buy loop just as the stock indices can, the fact that gold has declined, even as the dollar rallied, makes me anticipate a deepening decline. I have no plans to trade gold at this time, but if I did, it would not be on the long side.
I can support my negative attitude with this chart, which shows that the XAU Goodman Price/Volume Indicator has fallen below the support provided by the April 2004 high. However, it has paused at the resistance provided by the June highs, so there may be a bounce after this long decline.
Getting worse and worse, the Smart Money Indicator (bright blue line) lost 70 points Wednesday when it opened with a 30 point rally, and then fell 40 points in the final hour. It is now well below its May lows.
Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. You can send him your questions and comments via email at Fred@MarketMonograph.com. Emails sent to Fred may be published on this web site edited for clarity and brevity, and including your name unless you specify anonymity or not for publication. The charts and commentary represent what Fred is thinking about the market and thinking of doing for his own account and for accounts he manages at the time of writing. Fred, his clients, or his family may have positions or make trades in securities mentioned in these commentaries. Mutual funds mentioned by Fred may be advised by institutional consulting clients of Trend Macrolytics LLC; Fred has no economic interest in such business relationships. There is no guarantee that you will profit from trading as discussed herein. You may lose money and both Fred and Trend Macrolytics LLC assume no responsibility for what you do or do not do with this information. Copyright 2001, 2002, 2003, 2004, 2005 and 2006 Fred Goodman and Trend Macrolytics LLC. 
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