V - Does A Correction Start In The First Week Of August?

2023-08-07 09:59:06 ET

Summary

• The Trifecta Distribution Index (TDI) is shown in Table 1 for July and Table 2 for August.
• Table 3 indicates a potential correction starting in the first week of August.
• The article discusses the market corrections, the analysis of the Dow 7 Bear Stocks, and the investment portfolios of the third batch of Dow 30 stocks.

Introduction

Table 1 and Table 2 are the Trifecta in July (03 – 31) and in August first week (01 – 04), respectively, showing the Trifecta Distribution Index [TDI], described in here .

The two Tables are a Polar Case, although, Table 2 (Aug) had a small sample (4 days) while Table 1 (Jul) had a large sample (20 days).

The Summary Table, Table 3, demonstrated that 1) Bulls vs. Bears as 0 vs. 3 in Aug, while 2) Bulls vs. Bears as 11 vs. 4 in Jul.

No doubt Table 3 announces that a correction may start in the first week of Aug, even though in July we had the DIA (The Dow Jones Industrial Average State Street SPDR ETF) had the 13-days advance in a row from Jul 10 to Jul 26 in Table 1, and the only “P” print in Table 2 in Aug.

Four days in Aug would be one of the worst starting 4 days in a month in the recent years.

Charles Schwab reported:

“The major indices saw somewhat choppy action today as participants digested a slate of factors. Market participants were reacting to the earnings results from Apple (AAPL 181.99, -9.18, -4.8%) and Amazon (AMZN 139.57, +10.66, +8.3%), the July Employment Situation Report, and falling Treasury yields.

The pullback in market rates was in response to the jobs report, which showed a slowdown in nonfarm payroll growth that has the market considering the idea that it may be enough to keep the Fed on hold. The 2-yr note yield fell 12 basis points to 4.78% and the 10-yr note yield fell 13 basis points to 4.06%.

Those moves were a welcome development after longer-dated Treasury yields jumped over the last few sessions, keeping pressure on equities. The 10-yr note yield still rose nine basis points on the week.

Stocks found some upside momentum shortly after the open when the S&P 500 bounced off the 4,500 level. The major indices were trading up until selling increased in the afternoon trade. There was no specific catalyst to fuel the afternoon selling, but profit-taking activity was likely a driving factor. Ultimately, the major indices closed near their lows of the day, which had the S&P 500 below 4,500.

Shortly after the open, advancers led decliners by a 5-to-2 margin at the NYSE and a 3-to-2 margin at the Nasdaq. By the close, advancers had an 11-to-10 lead over decliners at the NYSE while decliners had the same lead over advancers at the Nasdaq.

Only two of the S&P 500 sectors closed with gains -- consumer discretionary (+1.9%) and energy (+0.03%) -- while the information technology sector logged the biggest decline.

Nasdaq Composite: +32.9% YTD S&P 500: +16.6% YTD Russell 2000: +11.1% YTD S&P Midcap 400: +10.3% YTD Dow Jones Industrial Average: +5.8% YTD.”

The Focus

The Review of The Market Corrections

The Analysis of the third Part of The DOW 7 Bear Stocks

The Major Market Correction in the 2010s and the 2020s

“ The Bear-Market Criteria

When the stock market drops by a minus 20 % (-20%) we call it a market correction. When the market decreases more than -20% we said it hit Bear market territory. When the Bear market situation continues for six months or longer, we are in a Bear market. We ignore intraday levels. We count only closing prices.

There were three cases when a clear down swings from 03/09/2009 to 09/09/2022:

· Case 1: 2,929.67 on 09/17/2018 ((T)), 2,416.62 ((B)) on 12/17/2018, and 2,939.88 on 04/22/2019 (T+)

· Case 2: 3,380.16 on 02/10/2020 ((T)), 2,304.92 ((B)) on 03/16/2020, and 3,397.16 on 08/17/2020 (T+)

· Case 3: 4,766.18 on 12/31/2021 ((T)), 3,636.87 ((B)) on 06/17/2022, and 4,130.29 on 07/29/2022 (T+)

Note: T, B, and T+ are Top, Bottom, and the date when surpassing the previous Top, respectively.

Case 1:

The S&P 500 fell -17.5% and four months later recovered. David Brett analyzed intraday values that were too volatile. This case didn't make a Bear market in terms of closing figures.

Case 2:

The S&P 500 sled -31.8% and five months were taken to surpass the previous Top. The decreasing-amount criterion (-20%) was satisfied but the length criterion (six months) was not.

Case 3:

As we witnessed, the intraday movements of the S&P 500 sank several times below -20% but shot above -20% not only Friday (05/20/2022) but also Thursday (05/19/2022).

Finally, on 06/17/22 the S&P 500 sank -23.7%, but stayed only one month and 15 days when it rebounded on 07/29/2022, closing at 4,130.29.

Our dear Bull is alive at this moment, according to the above criteria.”

(From “ A Bear? Or A Bull? It Really Doesn't Matter”

The fact is a stock-market correction seemed to start on Aug 4 (Friday). We, nevertheless, don’t know how deep and how long.

In general, a correction (up to -20% which is the bear market surface) or a mild bear market (perhaps up to –25%) is tolerable because the market becomes healthier, by removing disequilibrium, or by straiten distortions occurred during a bullish market.

The Investment Portfolios of The Third Batch of The DOW 30 Stocks

The Special Note: Three References, R1, R2, and R3, are put in the “REFERENCE” section after the main text to help readers:

R1: The PPO Approach, R2: Portfolios vs. Individual Stock, and R3: CORREL, The Description of the DJIA, four Batches of the DJIA, and the CORRELs among all 7 components of Batch I, and Their 13 Portfolio Templates.

This Third Batch, 7 Bear Stocks, follow the same method which was applied to the first Batch, 7 Bull Stocks. The latter consist of [[MMM]], [[DOW]], [[MSFT]], [[CAT]], [[CSCO]], [[AAPL]], [[VZ]], the former does of Honeywell (HON). Intel (INTC), Procter & Gamble (PG), Walmart (WMT), Coca-Cola (KO), Visa (V), and American Express (AXP)

Each line of Table2 from HON to AXP has the CORRELs with other 6 Stocks:

1) HON has 4 negative CORRELs with INTC, PG, WMT, KO.

2) INTC has 3 negative CORRELs with V, AXP, HON.

3) PG has 3 negative CORRELs with HON, AXP, V.

4) WMT has 3 negative CORRELs with V, AXP, HON.

5) KO has 3 negative CORRELs with HON, V, AXP.

6) V has 5 negative CORRELs with INTC, PG, WMT, KO, AXP.

7) AXP has 5 negative CORRELs with KO, WMT, PG, INTC, V.

The 10 DJIA Bear 7 Portfolio Templates

1) HON (30%) INTC (35%) PG (35%)

2) HON (30%) WMT (35%) KO (35%)

3) INTC (25%) V (25%) AXP (25%) HON (25%)

4) PG (25%) HON (25%) V (25%) AXP (25%)

5) WMT (25%) V (25%) AXP (25%) HON (25%)

6) KO (25%) HON (25%) V (25%) AXP (25%)

7) V (30%) INTC (35%) PG (35%)

8) V (25%) WMT (25%) KO (25%) AXP (25%)

9) AXP (30%) KO (35%) WMT (35%)

10) AXP (25%) PG (25%) INTL (25%) V (25%)

The Final Concerns

Aug 1 (Tue), Aug 2 (Wed), Aug 3 (Thu), and Aug 4 (Fri), the market revolted, by shaking unusually. The market pulled down drastically.

Tuesday the DJIA pushed higher to avoid another bearish Trifecta.

Wednesday, Thursday, and Friday, nonetheless, the Three Big Marks of Negative Trifecta were Logged in a Row.

We don’t know the size and the length of a correction, but a correction surely is starting now in my opinion.

The good story is the TDI (Trifecta Distribution Index) fulfilled very well to predict very promptly and accurately, but the bad story is we have to maneuver very cautiously in every session in a few weeks or so.

REFERENCE

R1. The Innovative “Paper-and-Pencil-Only” (“PPO”) Approach

The “PPO” Approach with a minimum help of EXCEL demonstrated a clear track on the coming up-/down-momentum and up/downtrend which has not been detected by clever algorithms (i.e., moving average) or sophisticated graphics or charts.

The PPO distinguishes the movement SPY or other ETFs as “P” (plus) or “m” (minus), without considering the size of changes.

Currently, The PPO approach works on 1) Uptrend, starting March 31, 2023, 2) the Trifecta Distribution Index [TDI], and the Sector Diffusion Index ((SDI)), as described in “Trend Investing with the Paper-and-Pencil-Only [PPO]”, Jul 17, 2023.

R2. Selecting Individual Stocks vs. Portfolios

Most investors invest in any single securities (stocks or ETFs). A single security is riskier than a portfolio, which is not just a group of securities, but is a well-selected cluster, considering mainly a lower correlation among all component to achieve your investment goal.

The portfolio templates are made by my investment experience in a couple of decades, and an extensive analysis with the observed market data which is the most trustful source. You can easily adapt any template and follow my instruction.

R3. Correlation Coefficient [CORREL]

CORREL computes how tightly to move for two components, ignoring the causality between them one way or the other. The tighter, the higher percentage. When two components move in opposite direction each other, we have a negative percentage.

Negative percentages or lower percentages are carefully selected and making a Portfolio with a bunch of three or four components

The Dow Jones Industrial Average {DJIA}

The DJIA is not a market-cap weight averaged, but a price weighted index. The DJIA moves faster than the S&P 500 and the economy, so quite often leads the market and the economy upward or downward.

Since July 10, the DJIA has moved up in 11 sessions in a row until July 24.

The 3 highest price stocks were 1) UnitedHealth ( UNH ) ($505.23), 2) Goldman Sachs ( GS ) ($354.19), and, 3) Microsoft ( MSFT ) ($350.98), while the 3 lowest price stocks were 1) Walgreens Boots Alliance ( WBA ) ($30.63, 2) Verizon ( VZ ) ($34.24) and 4) Intel ( INTC ) ($34.55).

We have to concentrate on higher priced stocks which have a heavier influence compared to lower price stocks.

The 4 Segments of the DJIA 30 stocks

1) The Leader (Bullish) [Bull] 7 Stocks (MMM, DOW, MSFT, CAT, CSCO, AAPL, and VZ)

2) The Bull 8 Stocks (UNH, CVX, CRM, JNJ, WBA, HD, AMGN, IBM)

3) The Laggers (or Bearish) [Bear] 7 Stocks (Hon, INTC, PG, WMT, KO, V, and AXP)

4) The Bear 8 Stocks (GS, MCD, JPM, MRK, TRV, NKE, BA, and DIS)

Fifteen “Bull” Stocks (which are 7 stocks, and 8 stocks), and Fifteen “Bear” stocks (which are 7 stocks, and 8 stocks) are just a tentative division.

The “Bull’ group happened to outperform, while the “Bear” bunch somewhat underperformed recently. All 30 DJIA stocks are well-selected blue chips. Therefore, investors should not think the latter are inferior to the former.

(From “ The Economy And The S&P 500 Led By The Dow?” Jul 31, 2023)

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