Daily Chart Sell Signals in SPX, NDX, and DJIA at Friday's Close

Daily chart sell signals were triggered by my computer trading system in the S&P 500 Index (SPX), the S&P 500 ETF (SPY), the Nasdaq-100 Index (NDX), the Dow Jones Industrial Average (INDU), and the Dow Jones Industrials ETF (DIA) at Friday's close, October 30th.

In the interest of full disclosure, I have now allocated 50% of my assets under management to a short position in the S&P 500 Index. The remaining 50% has been allocated to "Cash" and a modest long position in medium-term blue chip corporate bonds.

The price action in U.S. stocks following last Wednesday's FOMC announcement was nothing short of incredible. I've seen many short squeezes in my career as a trader, but Wednesday's last hour rally was clearly one of the strongest given the relatively hawkish news from the Federal Reserve (a December rate hike is definitely still on the table, according to Fed officials). Of course, in my view, there is NO CHANCE now of an interest rate hike from the Fed this year. Now it's just a question of whether or not there will be a hike next year!

If the Fed doesn't hike interest rates any time soon, isn't that bullish for U.S. stocks? At this point in the economic cycle (i.e. almost 80 months into an economic recovery), maybe the Fed will soon have to find a way to EASE monetary policy to fight the next recession, which I think is on the near term horizon. If the Fed actually eases monetary policy (with negative interest rates or another QE program), won't that be bullish for stocks? I guess everything depends upon how deep the next recession is and to what extent corporate earnings will suffer. Since I am bearish on U.S. stocks in general and short the S&P 500 Index specifically (without a hedge), then I clearly think the economic negatives immediately ahead will outweigh anything the Fed can do, at least temporarily.

My greatest fear as a short-seller is the potential increase in central bank purchases of U.S. stocks. I strongly suspect that central banks in Japan, China, and Switzerland already have significant positions in global equity shares (including U.S. stocks) on their balance sheets. And Mario Draghi has said that all assets, except gold, are being considered for purchase in the ECB's current and ongoing quantitative easing program. I guess the $64,000 question has to be now: "Are central banks omnipotent?" So far in this 6 1/2 year recovery, the answer has been mostly yes! With my current short position in the SPX, I obviously think that the "intimidation" factor of central bank omnipotence will be severely tested over the next several months!

S&P 500 Index Daily Chart with Computer-generated Buy & Sell Signals

Is There A Message In The Latest VIX Buy Signals?

In modern day portfolio management, if a respectable manager said he was 40% long U.S. Stocks, most would say that this a "defensive posture". 

And what would most Wall Street analysts say about a portfolio manager who was 40% short U.S. Stocks? They might say he was a crazy man who will soon lose his job!

To me, the risk associated with 40% long is almost the same as the risk of being 40% short, especially if you used the SDS double-short S&P 500 ETF as the primary bearish trading vehicle. With the double-short SDS, a 20% portfolio allocation gives you the equivalent of a 40% overall short position. And because you are actually LONG the SDS ETF, you can never lose more than 20% of your total portfolio, even if the S&P 500 Index vaults to infinity overnight!

Of course, if the S&P 500 Index rallies sharply, as it did this past Thursday & Friday, you are going to lose money with your SDS bearish S&P 500 position, as I did with mine.

Bearish traders and investors sustained heavy losses late last week, but I still think the next big swing in U.S. stock prices is to the downside. 

Here is an interesting chart of the VIX, where three daily chart buy signals have been triggered by my computer trading system over the last five days. If my computer trading system is right, there is about to be a fairly significant uptick in stock market volatility. Sharp increases in the VIX are almost always associated with major downturns in actual stock prices. 

VIX Daily Chart with Computer-generated Buy & Sell Signals

Bill Miller CNBC Interview - At The Top!

Who is the all-time greatest investment manager? There was a time not too long ago when Bill Miller's name would have been right at the top of a very short list of "greatest ever". As the Chairman and Chief Investment Officer of Legg Mason's Value Fund, Mr. Miller managed to beat the return on the S&P 500 Index for 15 years in a row between 1991 and 2005. While I am not sure if there are any "official" statistics for this category, I think that Miller's 15-year consecutive out-performance against the S&P 500 Index is a record which probably stands alone. And if he had retired at the end of 2005, Miller may very well have gone down in history as the "greatest ever"!

However, in the securities business (as in many walks of life), sometimes "we are only as good as our last trade!" Value investors, including Mr. Miller, were annihilated between August 2007 and November 2008 when Fannie Mae (FNM) and Freddie Mac (FRE) both went from $70/share to ZERO! While I don't have the exact figure, I believe that Mr. Miller's value fund had greater than a 65% draw-down during that period. So much for talk of the "greatest ever"! Still legendary, of course, but definitely no longer on the short list of "greatest ever" for Mr. Miller.

So where is Bill Miller now, and why this special SuttonWatch update in his honor? Bill Miller is currently the Chairman and Chief Investment Officer of Baltimore-based LMM Investments. LMM has $2.9 billion under management and is a partially owned subsidiary of Legg Mason. He was interviewed by CNBC this past Wednesday, October 14th. In that interview, Mr. Miller said that there are NO reasons to be bearish on the U.S. Stock Market. The list of positives, according to Miller, include moderate economic growth, low interest rates, and low inflation (among others).

NO REASON TO BE BEARISH ON THE U.S. STOCK MARKET !?

WOW !!

In my previous SuttonWatch column dated Sunday, October 11th, I said there are several major cycles that will turn down towards the end of this month. I was hoping to be patient enough to wait for evidence of those negative turns before establishing significant short positions in the U.S. stock market, but Miller's CNBC interview on Wednesday had a profound impact on me. Late last Thursday I dipped my toe in the water with a very minor short position in the S&P 500 using the double-short SDS ETF. And late Friday during a vicious last-hour rally, I executed a major short position that completes my commitment to the bearish case for the U.S. stock market immediately ahead.

This coming Monday is October 19th, a date that will live in infamy for most of the older traders and investors. In 1987, the DJIA fell 23% on that incredible Monday in October. To put this in perspective, the October 1987 single day loss was almost double the percentage loss sustained on any of the black days in the October 1929 crash! In 1987, the S&P 500 peaked on August 25th and bottomed out on October 19th. This year, the S&P 500 bottomed out on August 24th, and I strongly believe that the peak will be seen on Monday, October 19th (or was already posted at Friday's close, October 16th)!

Does anyone think that it's odd that no one on Wall Street is talking about the possibility of a Fed rate hike following the October 27-28 meeting? It seems to me that in almost every speech from from almost every Federal Reserve official over the last three months (at least), including Janet Yellen, a rate hike before year-end 2015 is still on the table. Why risk a rate hike in December just before the all-important holiday buying season? If a 2015 rate hike is going to happen, then I think the most logical time for the Fed to test the waters is at the late October meeting. While precious metals mining shares have recently posted big gains (50% or more) from their early September 2015 intra-day lows, daily chart sell signals have been triggered by my computer trading system in most of these stocks over the last couple of days. My recommendation now is to liquidate holdings in this sector in favor of a better buying opportunity later this year.

Caveat Emptor! Let the buyer of U.S. stocks beware!! Trouble immediately ahead!

S&P 500 Index Weekly Chart with 75-Week and 150-Week Moving Average Lines & Computer Trading Signals

Counter Trend Rebound In U.S. Stock Prices Nearing Exhaustion

Most major U.S. stock market averages are up between 7% and 13% since their August 24th panic lows. However, I now believe that this rebound is a counter trend rally, and that the early summer all-time highs in most major indices will NOT be exceeded (or even tested). 

In my technical work, I see several longer term stock market cycles peaking between now and the end of this month.

On the fundamental side, I would be very surprised if 3rd quarter corporate earnings reports provide significant upside support for stocks, and I would not be surprised at all if 3rd quarter earnings reports were actually negative relative to expectations, on balance. While the energy and mining sectors may be bright spots immediately ahead, the rest of the market looks poised on the precipice of a major downturn which will significantly violate that August 24th panic lows.

While I think my computer trading system did well in navigating this latest rally, I now believe that the weekly chart sell signal in the S&P 500 Index from July 24, 2015 is the dominant signal (see chart below). The counter-trend rally which has unfolded since the panic lows of August 24th looks tired to me.

S&P 500 Index Weekly Chart with 75-Week & 150-Week Moving Average Lines & Computer Signals