Buy—Don’t Hold:

Market Review

The stock market had another uneventful week with a powerful rally on Friday sending the major market averages to the highest levels in five years.  The absence of negative financial news from Europe and decent U.S. economic news was a welcome event. The DJIA closed above the critical 14000 level which was widely covered by the financial and traditional media.  This event will most likely whet the appetite of investors who have not participated in this rally or in this market for the past few years.  Some of these unsophisticated investors will enter the market now as it is reaching very overbought levels.  This may push this rally further along, but a pullback is more than overdue at this point.

For the week the NASDAQ Composite was the leader up 0.93% closing at 3179.10, after being the laggard the prior week. The DJIA advanced 0.82% to close at 14009.79 and S&P 500 Index closed at 1513.17 up 0.68%.  Both the DJIA and S&P 500 are within a few percentage points away from their October 9, 2007 highs.  The NASDAQ Composite still has a ways to go, as it has lagged on a year-to-date basis.

Year-to-date the DJIA is leading the race up 6.91%, followed by the S&P 500 up 6.10%, and the NASDAQ Composite up 5.29%.  As a comparison, the BDH ETF portfolio is up only 4.56% according to the calculations of www.dark-liquidity.com.   This portfolio has been mostly invested in international ETFs which have underperformed the U.S. domestic ETFs.

Indicator Review

Indicator #2 NASDAQ Composite and 100-dma.  This indicator remains on its January 3 BUY signal with the index price and the 100-dma rising.   (Refer to first chart).

Indicator #5 NASDAQ Composite with MACD.  This indicator had a SELL signal on January 30, 2013, but an upward crossover could occur with a continued market rally. (Refer to first chart).

Indicator #6 AAII Weekly Investor Sentiment Survey Bullish Percentage. The latest January 31^stbullish reading of 48.0% was a decline from the January 25^th bullish reading of 52.3%.   This week’s reading below the 50% level resulted in a  SELL signal on this indicator, as investors backed off a bit from their very bullish reading of the prior week.

Remember that when this indicator reaches a level of 50% or higher and subsequently falls below 50%, then a SELL signal is issued.  That is what happened this past week. So this indicator now changes from a “0” to a “-1”.  The Dashboard is not changed as only +1 signals are counted in summing up the four indicators.

Indicator #8 NASI Summation Index and MACD.  The indicator remains on its BUY signal, although the MACD had a negative crossover this week.   Remember that the Index needs to crossover its 5 day-ema, as well for this indicator to signal a  SELL signal.  So watch this indicator this week. (Refer to second chart)

Dashboard Still on a “2”Neutral signal

A chart of the Dashboard BUY and SELL signals is presented here:

Dashboard-V2-February 1 2013

A chart of the BDH Dashboard signals is presented here:

http://stockcharts.com/h-sc/ui?s=$COMPQ&p=D&yr=2&mn=0&dy=0&id=p50034199149&a=250074893

 Top 5 ETFs          

The Top 5 ETFs had a mixed week. So far this portfolio has gained 7.25% since the November 28^th BUY signal compared to the average benchmark’s gain of 7.16%.  XHB and EFA continue to outperform.  EPI  and PHO are laggards.  Note that EFA ranked 7^th and EWA ranked 9^th are declining in the ranking and are approaching the critical 10^th ranking level.  Since the international ETFs have not been keeping pace with the domestic ETFs they need to be watched daily to determine if they need to be sold and replaced. The link to the current portfolio and statistics is here:

Top-5-ETF-Tracking-February 1, 2013

I have received a number of inquiries regarding the Top 5 ETFs regarding a Fail reading while we are holding it.  That Pass/Fail readings are used solely when an ETF is to be purchased not when they are already in the portfolio.  Only if an ETF drops below rank 10 or is stopped out should it be sold.

Please note that I do not post changes to the ETF Top 5 portfolio during the week.  It is your responsibility to check the Decision Page daily to see if any   ETFs should be sold and replaced if they fall below rank 10.  Any changes will be reported in the weekend blog. Additionally, make sure a Stop Limit order is placed on each position according to your risk tolerance.

Dark Liquidity

www.dark-liquidity.com/BDH2new.php independently tracks the BDH performance.  Year-to-date the portfolio is up 4.56% still trailing all three benchmarks as mentioned in the Market Review section above.  These ETFs advanced only 0.34% for the week which was well below that of the major indexes as reported earlier.

Conclusion

The market continues its march higher, but the DJIA is leading the parade with the NASDAQ in last place.  This is the opposite to the norm of the NASDAQ which usually leads the way higher.  Since the DJIA is composed of blue chips and the NASDAQ Composite is composed of more speculative issues, this is a warning that the end of this rally may be near as investors are favoring more stable well-established companies.

Whether the DJIA and S&P 500 are able to reach their 2007 peaks this week remains to be seen.  If it does reach those levels, then the question is whether or not it can exceed those levels or retreat  a bit.  We’ll have to wait and see what happens. 

Action Plan

Be alert to a possible Dashboard SELL signal at any time.  Make sure to look at the $NASI chart which you should have as a bookmark to determine if a SELL signal has occurred end-of-day.  Also check the NASDAQ Composite chart to see if the MACD crossover has changed direction from its current SELL signal.

You may want to tighten your stop LIMITs to 3% or less, so that any you retain as much of your profits as possible before a possible decline sets in.  You can use trailing stops at a level you feel appropriate.  The other option is to sell a portion (25-50%) of your portfolio, if we reach the 2007 price peak to lock in some profits, even if there not a Dashboard SELL signal.  That is not part of the BDH methodology, but that is something you may want to personally consider.  Remember that no one knows how the market will perform going forward.  You are solely responsible for managing your own portfolio.