My Fear or Strength Model has been in bearish mode for the last 16 trading days.
Here’s the chart:
(right-click and open image in new tab to zoom in)
Let's break down what it shows:
The black line in the top panel is the S&P 500 index price.
The green shading highlights the model is in bullish mode.
The red shading highlights the model is in bearish mode.
The black line in the middle panel is the 10-day average of the NYSE+NASDAQ net new high advance decline line - The “strength” component of the model. The gray shading represents the AD line is rising.
The black line in the bottom panel is the Volatility index - the “fear” component of the model. The gray shading represents the VIX reading above 28.5.
The Takeaway: My Fear or Strength Model is a tactical framework that has two triggers:
Buy stocks when there is market strength.
Buy stocks when everyone is fearful.
If neither of these conditions is met, it's best to sit on the sidelines and enjoy a game of golf. By adhering to this approach, I effectively capture gains while minimizing the risk of losses in the S&P 500.
Recently, new 52-week lows on the NYSE and NASDAQ have been outpacing new highs in 17 out of the past 21 trading days. As a result, my Fear or Strength model has shifted into bearish mode and has remained so for the past 16 trading days.
This suggests to me that it is time to be cautious and refrain from allocating capital to the market.
If this bull market is going to continue, I would like to see the model turn back into bullish mode sooner rather than later.
Grant Hawkridge | Chief Aussie Operator, All Star Charts
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