Equity Markets Poised for Significant Rally Off of Extreme Oversold Condition

Trading ETFs as an Alternative to Mutual Funds

I do not believe in the buy and hold mentality followed by most mutual funds. I don’t agree that one should just look at the long term and sit around and wait. There are a significant number of opportunities to enter and exit the markets throughout the year. Some people say that they don’t have time to manage their money and they would rather let a professional do it. I believe one can manage their own money by utilizing exchange traded funds with which one can buy, sell, and/or short the markets with minimal commissions. There are exchange traded funds which mirror the U.S. equity markets such as the SPY (S&P 500), DIA (Dow Jones Industrial Average), QQQ (NASDAQ), and IWM (Russell 2000). One should question why they are paying management fees when they can trade exchange traded funds themselves.

A study reported in the New York Times showed that very few mutual funds “sustained consistent and persistent outperformance.” Only 2 of the 2862 mutual funds in the study “managed to achieve top-quartile performance” over the five year period studied. The article can be viewed here:

Over the weekend I was at a friend’s house and they showed me an annual report from an index fund that they have invested money in. The fund was down 15.75% for 2015. Over the course of five years the fund is down. There were two things in the report that really got to me. In the report it says that the fund is down in line with the benchmark for the overall index. They seem satisfied that they were in line with the benchmark. That does not do it for me. One should strive to outperform and not sit like a deer in headlights when the markets drop. Later in the report it says, “The markets are unpredictable and often confounding, keeping your long term plans clearly in focus can help you weather the periodic storms.” This infuriated me. They want their clients to sit there and hold their money while the fund collects their management fee. They say that no one can time the market. If you look at my calls in 2015 and early 2016 I have a pretty good track record. I want people to take a step back and understand that after working so hard for your money over the years you should be able to manage your money on your own. One should not give their money to a mutual fund manage, a person you have never met before, and hope they will outperform the market when you can do it yourself.

Follow Steve on Twitter at @stevekalayjian

U.S. Equity Markets

Today the markets were strong early on. The S&P futures traded up to 1928.75 and the Dow Jones Industrial Average was up about 100 points. The Dow Jones Industrial Average was then down 100 points, came back, sold off again, and then shot up towards the end of the day. At 3:20 the S&P futures rallied from 1897 all the way up to 1922.75, more than 25 handles in about 20 minutes.
On Friday I stated that the markets were extremely oversold and that I thought the markets would pull in today and then rally. That is exactly what I am seeing. I would not be surprised if the S&P futures got up into the 1965-1985 range. Today the S&P futures closed around the 1914 level. The markets are extremely oversold and I have sell signals on the weekly charts. On my weekly charts the trend algorithm will not go from negative to positive in only one week. This move could last anywhere from 3-30 weeks, I don’t know. All I know is that I have a sell signal and I am looking for a bounce on the daily charts to work off the oversold condition where I would look to get short. I think there is a good chance of that opportunity coming in the next 4-5 business days.

Follow Steve on Twitter at @stevekalayjian

Crude Oil

Today crude oil was down about 6%, trading below the 31 level at one point. My stop on crude oil is 30. I am lowering my target for crude oil to the 35.50-36 range. Crude oil is extremely oversold. On January 7th when crude oil traded up to 34.20 I tweeted that I would look to exit any positions in crude oil that had been bought lower. I now have a wait and see approach to crude oil. We are seeing significant signs of deflation in crude oil, heating oil, gasoline, and various other commodities. For 2015 in the agricultural sector corn was down 12%, wheat was down 21%, coffee was down 25%, and soybeans were down 15%. We are seeing a deflationary picture on the horizon.

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Gold

Today gold pulled back nicely. I am looking to see if gold can pull into the 1075-1085 range where I would look to buy. I am hoping this pullback occurs between now and Thursday.

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Thank you,

Stephen Kalayjian
@stevekalayjian

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