Written by: Angela Akers
The market began the New Year with a bang. In the first two trading weeks, the Dow added 3.5%, the S&P500 rose 4.2%, the Nasdaq climbed 5.9% and the Price of the VectorVest Composite (VVC) increased 5.6% through January 13, 2023. However, the mood soured a bit this week as earnings came in mixed, December Retail Sales, Industrial Production, Housing Starts and Existing Home Sales came in negative, and the jobs market remains tight. Concerns over an impending recession and rising interest rates resurfaced causing investors to become defensive. The Primary Trend of the market turned to Down yesterday, but today’s upside market movement pushed it back to Up.
Nevertheless, we saw our first indication of an overbought market last week when the Market Timing Indicator, MTI, entered the historically overbought range of 1.50-1.60. History has taught us that when the MTI moves above this level, stock prices are due for a pullback. That pullback may not happen immediately, but we will begin to see the uptrend weakening. In last Friday’s Strategy section of the Views, I wrote, “it is interesting to note that our MTI, at a level of 1.56, is already in the middle of the historically overbought range of 1.50-1.60 which typically indicates that the market is looking for a top.”
When we begin to see signs that the market is overbought, an investor should consider adjusting their outlook to accommodate a down trending market. This means that you and I should begin thinking about implementing defensive strategies to protect profits and begin thinking about strategies to deploy that will help us profit in a falling market.
Of course, the surest way to preserve your capital is to exit your long positions. You could sell them outright or wait for the VectorVest Sell signal. The talking heads suggested some of this week’s downside movement was due to investors locking in profits from the previous two-week run-up. Another thing you could do is use protective stop-loss orders by adjusting to tighter stops. Dr. DiLiddo discusses this subject in Chapter 13 of his classic investment book, “Stocks, Strategies & Common Sense.”
You might also consider buying Contra (Short) ETFs. Contra ETFs are designed to go up when the market is going down and you can buy them just like a stock. Buying Contra ETFs gained widespread popularity during 2022 for obvious reasons, but VectorVest has been advocating buying these Contras during down-trending markets since Dr. DiLiddo wrote an Essay entitled, “Contra ETFs” on November 2, 2007.
Another strategy you might employ is selling risky, overvalued stocks that are falling in price, ie., selling stocks short. When you sell stocks short, you are betting that the stock will go down in price. The VectorVest RealTime Derby is an ideal tool for finding good candidates to sell short when the market is falling. Bearish searches dominated the 1-Day and 5-Day Derby Winners Wednesday and Thursday. The top 1-Day Derby Winner was Doug’s Downers Supercharged, up 10.4% Wednesday. On Thursday, Crash Landers was the top 1-Day Derby search, up 4.6%. Not too shabby for one-day gains.
Finally, you might also consider some other defensive measures like buying Put Options, Selling Covered Calls, executing a Collar Option or buying index Put Options. Options are an essential tool that VectorVest believes every investor should have in their investing toolbox. If you’re new to Options, take some time and check out our FREE Options Foundation course on the VectorVest University.
Learning and implementing these techniques will help you Build A More Profitable Portfolio.
PS. You may also want to consider learning how to generate consistent income with Options. Our Options Paycheck Experience has taught hundreds of investors how to safely and consistently create a new income stream.
According to FactSet, 11% of S&P500 companies have reported their Q4 2022 results with 67% beating their earnings estimates and 64% reporting revenues above estimates. As of tonight, our Market Climate Graph shows that the 50-Day MA of the VV S&P500 WatchList Average EPS, remained unchanged at $9.18 per share, while forecasted average earnings growth remained at 13%/yr. The Market Climate Graph shows that the Earnings Trend Indicator, ETI, also remained unchanged at a level of 1.03. Since it remains above 1.00, the market is in a Bull Market Scenario. Stay tuned for our next Earnings Update.