A Correction Signal From The S&P 500 11-Sector Diffusion Index

Introduction

Last week the Trifecta Distribution Index [TDI] flashed a Correction Signal completely suddenly. Both the TDI and the SDI (the S&P 500 11-Sector Diffusion Index) have a Daily Signal.

These two indices are not products of the time-series analysis such as econometric models, but a sort of a cross-section analysis outputs.

Adding a couple of days will help their signals clearer day after day. Also, the Uptrend watch hints whether it indirectly supports the signals.

The description of both the SDI and the TDI is here, and the Paper-And-Pencil-Only [PPO} Approach (for Uptrend, the TDI, and the SDI) is there.

The Focus

The SDI, TDI, and Uptrend Watch update.

The Analysis of the Fourth Batch of the DJIA 8 Bear Stocks.

The SDI as of Aug 07, 2023

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Table 1 and Table 2 are the Jul SDI and Aug (01 – 07) SDI, respectively. The average [AVG} of Aug first four days of the first week (01 – 04) was 20%. Monday (Aug 07) the Trifecta was 91% in a low-volume and sloppy market. All session my 20 holdings didn’t move and I had no chance of any meaningful trading. The AVG for Aug 5 days was 35%, while the July AVG SDI was 60% (which was 1% shy of the record 61% in Jan)

As a consequence, the Correction Signal, emitted by the TDI Friday (Aug 04) will be on until both the SDI and the TDI will climb over 50%.

The TDI as of Aug 07, 2023

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Monday (Aug 07) neither bullish Trifecta [BLT] nor bearish Trifecta [BRT] was obtained, so BLT vs. BRT was 0 vs. 2 while in Jul, BLT vs BRT was 11 vs. 4.

The Correction Signal will be on until BLT and BRT will be tie.

You can reconcile Table 3 with Table 33 in the TABLE section after the main text.

The Uptrend as of Aug 07

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Table 4 is a summary of the current status of the 4-months-one-week old Uptrend. Although the Uptrend weakened a little bit as Bullish [BL] vs. Bearish [BR] 1 vs. 4, in Jul BL vs. BR was 13 vs. 7. Together BL vs. BR was 14 vs. 11.

There is still a room to keep the Uptrend safe in 2Q (Apr, May, Jun) in addition a big margin, as shown in Table 44 in the TABLE section.

In sum, A Correction Signal, stated on Aug 04 by the TDI, and confirmed by the SDI, TDI, the Uptrend on Aug 07 is still required to be continuing to Watch Every Session.

Charles Schwab reported on Aug 07 as:

“There wasn’t a lot of trading action today. Most of the work was done at the open. After that, the broader market fought to retain its gains, and add to them, on a day that was light on market-moving corporate news, light on economic data, and light on volume.

Today featured buy-the-dip activity that favored blue chip stocks and value plays, which, in some cases, were one in the same. The end result produced a day of healthy gains for the Dow Jones Industrial Average, which saw only three of its 30 components end in negative territory, and the S&P 500 closing above 4,500 and settling near its highs for the session.

Apple (AAPL 178.85, -3.14, -1.7%) was one of the four Dow laggards, extending its post-earnings report losses as investors grappled with valuation concerns and reports of weakness in the smartphone market. It was largely responsible for the underperformance of the S&P 500 information technology sector (+0.3%); however, strength in Microsoft (MSFT 330.11, +2.33, +0.7%), as well as in NVIDIA (NVDA 454.17, +7.37, +1.7%) and other semiconductor stocks, helped offset Apple’s drag.

Similarly, further gains in Amazon.com (AMZN 142.22, +2.65, +1.9%), coupled with strength in online travel agencies and retail stocks, helped the consumer discretionary sector (+1.1%) overcome the weight of weakness in Tesla (TSLA 251.45, -2.41, -0.9%), which was clipped by the surprising news that its highly-regarded CFO, Zachary Kirkhorn, stepped down as of August 4. Tesla, however, rebounded after being down as much as 4.4%.

Six of the 11 S&P 500 sectors finished with a gain of at least 1.0%. Communications services (+1.9%) led the rankings on the back of strength in Alphabet (GOOG 131.94, +3.40, +2.7%) and Meta Platforms (META 316.56, +5.83, +1.9%) followed by financials (+1.4%), which rode the coattails of Berkshire Hathaway (BRK.B 362.49, +12.50, +3.6%) following its pleasing Q2 operating results.

The only economic release today was the June Consumer Credit Report, which showed a $17.9 billion increase in consumer credit (Briefing.com consensus $13.0 billion) that was driven entirely by an increase in nonrevolving credit. Revolving credit saw its first decline since April 2021.

This data did not affect the Treasury market much at all, which saw an imbalance throughout the day that saw shorter tenors tick higher and longer tenors give back some of their gains from Friday’s rally as they digested Fed Governor Bowman’s (FOMC voter) belief that additional rates hikes will likely be needed to get inflation back to the Fed’s goal, and the assertion from New York Fed President Williams (FOMC voter) that the Fed could be close to its peak rate.

The 2-yr note yield settled the session down one basis point to 4.77% and the 10-yr note yield settled the day up two basis points to 4.08%.

Nasdaq Composite: +33.7% YTDS&P 500: +17.7% YTD Russell 2000: +11.2% YTDS&P Midcap 400: +11.2% YTD Dow Jones Industrial Average: +7.0% YTD.”

The Focus

The Review of The Market Corrections

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

The Major Market Correction in the 2010s and 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 Jul 4 (Friday). Then it was confirmed by the SDI, the TDI, the Uptrend as of Aug 07. We, nevertheless, don’t know how deep and how long.

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

The Investment Portfolios of The Fourth Batch of The 8 Bear DOW 30 Stocks

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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 fourth Batch, 8 Bear Stocks, follow the same method which was applied to the first Bach, 7 Bull Stocks. The latter consist of MMM, DOW, MSFT, CAT, CSCO, AAPL, VZ, the former does of Goldman Sachs (GS), McDonald’s (MCD), JPMorgan Chase (JPM), Merck (MRK), Travelers (TRV), NIKE (NKE), Boeing (BA), Walt Disney (DIS).

Each line of Table2 from GS to DIS has the CORRELs with other 7 Stocks:

1) GS has 3 negative CORRELs with MCD, MRK, DIS.

2) MCD has 5 negative CORRELs with GS, BA, NKE, TRV, JPM, and 2 lower CORRELs with MRK DIS.

3) JPM has 3 negative CORRELs with MCD, MRK, DIS.

4) MRK has 4 negative CORRELs with NKE, GS, BA, JPM.

5) TRV has 2 negative CORRELs with MCD, DIS, and 3 lower CORRELs with MRK, NKE, BA.

6) NKE has 3 negative CORRELs with DIS, MRK, MCD, and 2 lower CORRELs with BA, TRV,

7) BA has 3 negative CORRELs with MCD, DIS, MRK, and 2 lower CORRELs with TRV, NKE.

8) DIS has 5 negative CORRELs with GS, NKE, TRV, JPM, BA, and 1 lower CORRELs with MCD.

The 14 DJIA Bear 8 Portfolio Templates

1) GS (25%) MCD (25%) MRK (25%) DIS (25)

2) MCD (35%) BA (30%) NKE (35%)

3) MCD (30%) TRV (35%) JPM (35%)

4) MCD (30%) GS (35%) DIS (35%)

5) MRK (25%) GS (25%) NKE (25%) MCD (25%)

6) MRK (25%) JPM (25%) BA (25%) TRV (25%)

7) TRV (30%) MCD (35%) NKE (35%)

8) TRV (25%) DIS (25%) MRK (25%) BA (25%)

9) NKE (30%) BA (35%) DIS (35%)

10) NKE (25%) MRK (25%) MCD (25%) TRV (25%)

11) BA (30%) MCD (35%) TRV (35%)

12) BA (25%) DIS (25%) MRK (25%) NKE (25%)

13) DIS (25%) GS (25%) TRV (25%) BA (25%)

14) DIS (25%) NKE (25%) TRV (25%) MCD (25%)

The Final Concerns

On Aug 1 (Tue), Aug 2 (Wen), Aug 3 (Thursday), 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, Three Big Marks of Negative Trifecta were Logged in a Row.

Then Monday (Aug 07) we had a nice BL SDI 91%, a good BL TDI print, and a tick improvement in the Uptrend.

We don’t know the size and length of correction, but a correction surely is starting now, and we must check the run of the correction status every session, in my opinion.

The good news is the SDI, the TDI, and the current Uptrend fulfilled very promptly and accurately.

The bad news is bulls have to stay the course no matter how a correction will turn out to be 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)

TABLE

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