Buy when there’s blood in the streets

When everyone else is selling, ValueTrend portfolio manager Keith Richards starts looking for buying opportunities. He recently reviewed four of the dominant trends in seasonally favourable groups. They are technology stocks, industrials, financial stocks and consumer discretionary stocks. All of these sectors are favourable into late winter or spring.

Dominant_TrendsDuring the Panic of 1873 in Paris, when everyone was selling, Baron Rothschild was buying. When asked about his buying decision, Rothschild apparently replied that: “The time to buy is when there is blood in the streets.”

As noted in my blog The Smell of Fear, www.valuetrend.ca/the-smell-of-fear there are some quantitative factors that we can watch for signs of ‘blood in the streets’. I have collected a number of these ‘fear-sensing’ sentiment factors, along with some breadth and trend factors—and created a broad based indicator that I call the ‘Bear-o-meter’.

The newest reading of the Bear-o-meter focused on some of its individual components that have changed over the past month. My last reading was on October 3, when it read an astoundingly low ‘1’—very deeply bearish. This reading looks to have been vindicated, given the carnage that began literally the next day. I should note that the Bear-o-meter normally doesn’t work that accurately. It is a risk/reward reading—not a market timing program.

But, it appears that deeply bearish or deeply bullish readings (i.e. close to 0, or close to 8) may offer some insight on near-termed moves. My point is, don’t expect that to happen all of the time. I use this system to read potential risk and reward, not to time entry or exits. The Bear-o-meter reads ‘4’ at this time. That’s neutral. So we are at an average risk/reward tradeoff at this time. That can change, likely to a bullish setup, sooner rather than later.

When the blood is running in the streets, we want to start looking for buying opportunities. I decided to review four of the dominant sector trends in seasonally favorable groups. They are Technology stocks, Industrials, Financial stocks and Consumer Discretionary stocks.

All of these sectors are favorable into late winter or spring. So these are not short termed seasonal patterns—they offer a bit of wiggle room to refine your entry point. I’ll use the SPDR ETFs to illustrate the sectors. Let’s get at it.

Technology Select Sector SPDR Fund (NYSEARCA—XLK)

The XLK ETF broke a trendline and its 200 day SMA (simple moving average) recently. It has not taken out its last significant support low of $62 from February. A move back above the 200 day SMA (currently near $69) would signify a probable reversal of the current dangerous pattern. Watch for that break.

Industrial Select Sector SPDR Fund (NYSEARCA—XLI)

This is one distressed chart. The neckline break at around $71 paints a Halloween-scary picture. I would expect an oversold bounce back to that price point, but the chart shows clear and present danger past that potential. For now, I am inclined to avoid the sector, despite the positive seasonal tendencies.

Financial Select Sector SPDR Fund (NYSEARCA—XLF)

The financial sector looks to have broken its technical support (neckline) at around $26. It’s not so far below that level as Industrials—but there is little question of the precarious look to the current chart pattern. If the sector doesn’t rebound back above $26 again shortly, it could be ugly. I’d be wary for now. A decisive move over $26 might change the picture.

Consumer Discretionary Select Sector SPDR Fund (NYSEARCA—XLY)

XLY broke its trendline and the 200 day SMA. But, it did this in 2016 and still managed a recovery. So I’m inclined to play this like I would XLK. That is, a move back above the 200 day SMA—currently residing around $107—might inspire me to buy into the sector.

Keith Richards, CMT, CIM, FCSI Keith has been in the securities industry since 1990. As portfolio manager and founder of ValueTrend Wealth Management, he manages $150 million in assets and runs a discretionary investment service for high-net-worth clients. ValueTrend Wealth Management was recently selected to receive the 2019 Canadian Business Excellence Award for Private Businesses—having received it in 2017 as well. Mr. Richards’ books, SmartBounce: 3 Action Steps to Portfolio Recovery and Sideways: Using the Power of Technical Analysis to Profit in Uncertain Times, are available in bookstores.

This is an edited version of an article that was originally published for subscribers in the November 2018/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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