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August 8, 2022

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Stock Market Outlook: a Secondary Reaction within a bearish Major Trend.

The S&P 500 stock price index lost some upside momentum last week but still managed to close up 0.36% while shrugging off negative news. The Bank of England raised interest rates again and warned the UK will fall into recession, with the UK economy declining in Q4 this year and shrinking further through 2023. Italy's credit rating outlook was cut to negative by Moody's Investors Service. On the other side of the world, China's temper tantrum over Pelosi's visit to Taiwan "will likely bring with it increased economic disruption and pressurize an already-tense relationship at a particularly inopportune time, as global markets stagger, inflation surges upward, and COVID continues to ravage the globe," in the opinion of defense policy specialist, Blake Herzinger, writing for newsweek.com. Finally, Friday's US employment report showed excessive strength and a tight labor market, which may add to inflationary pressures and is the exact opposite of what the Fed is trying to accomplish with its Quantitative Tightening.

The stock market trend turned systematically neutral on about 7/19/2022, when the majority of price indexes crossed above their 50-day Simple Moving Averages (SMAs), according to the 50/200 SMA system. This system will turn bearish again when price crosses below the 50-day SMA.

The Dow Theory, which remains bearish on the Major Trend, suggests a rising, medium-term, Secondary Reaction. Stock price indexes already have recovered one-third to two-thirds of their 20% loss from January to June, which is typical for a Secondary Reaction.

Sentiment indicators for the stock market show diminishing bearish feelings of the crowd. These indicators have been signaling mostly oversold sentiment for most of 2022, and sentiment appears to be the driver behind this stock market Secondary Reaction recovery since 6/17/2022. Sentiment indicators measure the emotional reactions of the mob, and such emotions can change frequently and suddenly. As we wrote previously, oversold sentiment "could make the stock market vulnerable to short-squeeze rally attempts at any time." With the major trend still bearish according to the Dow Theory, however, Secondary Reaction price recoveries could quickly fizzle out at any time. It depends on the emotional reactions of the mob.

Unfortunately for the world, the list of market risks for 2022 has been getting worse. Fortunately for our asset management clients, we have managed to avoid significant losses, thanks to our continuous analysis of global financial conditions that allows us to anticipate potential negative changes ahead of time. Here is what this report stated on 12/31/2021:

"Looking ahead, the times appear to be changing, and market performance for 2022 appears unlikely to resemble the performance of 2021. The Federal Reserve is expected to reduce monetary stimulus, eventually leading to rising interest rates and higher discount rates applied to asset price valuations, which could put downward pressure on stock prices. The pace of economic and earnings growth appears likely to slow down. Inflation has been higher and more persistent than the authorities expected. Supply chain disruptions may continue. Geopolitical tensions appear to be rising, with Ukraine, Iran, and China the most obvious current hot spots--and there are other possibilities. Wall Street expectations and stock allocations have been very optimistic, quite possibly overly optimistic, for many months, leading to an overvalued stock market. Financial Stress is rising. From a long-term perspective, stocks remain overbought and overvalued relative to traditional measures: sales, earnings, dividend yields, and book value. Stocks are priced for an extremely optimistic future, ignoring all potential bumps in the inherently unpredictable road ahead. Berkshire Hathaway's Charlie Munger thinks stock valuations are "crazier" now than they were in the dot-com bubble in years 1999-2000. History shows that overly high stock prices are followed by low returns, and overpaying for stocks is not profitable in the long run."

Our full report reviews indicators that we monitor every day and offers clear and unbiased guidance on the following each week:
Global stock markets
The Defensive stock sectors
The Health Care sector
The Cyclical sectors
The Technology sector
The Financials sector
U.S. bonds and notes
Commodities (Oil, Metals, Agriculture)
Objective Quantitative Rankings for hundreds of Exchange Traded Funds

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Now is the time to take action. Preserve your capital by placing your assets under our careful management--before the next major bear market of -20% to -50% devastates most portfolios.

Make no mistake, the ongoing global economic and financial crisis has not been fixed by any sound or lasting solution. History shows that the authorities will not protect you or give you any advance warning--but we will.

If you agree that making money while staying safe is better than taking big risks in the stock market and exposing your nest egg to potentially ruinous losses, we would be very happy to implement our time-tested strategies for all of your assets. It makes good sense to choose protection--especially at this time when the financial world is stretched out of proportion.

We are always happy to discuss your goals and concerns and answer all your questions.
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Weekly Rankings of Major Trend Relative Strength

My weekly Top 10 ETFs ranked by the Major Trend Relative Strength outperformed the S&P 500 by over an 11-year period of real-time weekly tests. Click here for a graph of simulated performance.

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My latest book was named one of the top investment books by Stock Trader's Almanac 2005. This book also received an excellent review in the November 2003 issue of Futures.
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My ETF Rankings are not investment advice. Rather, they are an objective ongoing research study.

Analysis of market forces may offer a sense of probabilities. But the many variables that can impact market prices are notoriously difficult to predict. And, market analysis is something less than an exact science. So, sound trading tactics are always recommended. See my
Money Management Rules.

According to CFTC Rule 4.41, hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

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Robert W. Colby, CMT,
is a consultant to institutional and private investors and traders, providing regular analytical reports, custom research services, and trading systems tailored to clients' objectives. Clients include the most successful traders and investors in the world. Robert is the author of The Encyclopedia of Technical Market Indicators, Second Edition, McGraw-Hill, 2003, which has become the standard reference for indicator and trading systems design. Previously, at several large Wall Street firms, Robert worked as a proprietary trader, technical analyst, and fundamental analyst. He also was adjunct professor at New York University and New York Institute of Finance, where he developed new courses on technical analysis and market timing.

Robert W. Colby is a Chartered Market Technician (CMT), an accreditation granted to members by the CMT Association (https://cmtassociation.org/) after demonstrating professional competence and ethics over a period of many years. Robert has been a member since 1980, and he strongly supports the CMT Association's high standards. He also supports the The Technical Analysis Educational Foundation (https://www.taeducation.org/about/), which works to have technical analysis included in the curriculum of major business schools. The CMT Association is the national organization of investment analysts, stock market analysis professionals, and certified market technicians in the United States.

 
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Ranking ETFs
"Robert Colby has evolved a system that, while hardly foolproof, is pretty clever," wrote Daniel Fisher, "Surfin' ETFs", Forbes, Investment Guide, Special Issue, June 4, 2007.
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INTERVIEW of Robert W. Colby in Technical Analysis of STOCKS & COMMODITIES magazine, December 2006 issue.
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"Gold's next move: History, logic, and intermarket relationships. See if testing gold's relationship to different markets over a 32-year period provides possible trade signals for the yellow metal."
by Robert W. Colby, CMT.
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"Which gold indicators are best? Divining gold's next move."
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"Applying the Relative Strength strategy to ETFs."
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"PUTTING CANDLES TO THE TEST, How Profitable Are They Really?" by Robert W. Colby, CMT. Published in SFO, STOCKS, FUTURES AND OPTIONS MAGAZINE, Volume 5. No. 8. August 2006, pages 91-94. Please click here to buy this article. (Scroll to bottom of linked page.)
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TradingMarkets.com interviewed
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Active Trader magazine September 2004 interviewed Robert W. Colby. 4 pages. "Robert W. Colby: Technical collector. A discussion with Robert W. Colby about technical trading and his revised Encyclopedia of Technical Market Indicators, Second Edition. By Active Trader Staff."
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For information about
methods that would have performed substantially better than systematic trend-following in back-testing simulation dating back 32 years, email me by clicking on the following link:
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Click here for a simulated performance graph of one of my trading systems applied to a stock price index.
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MetaStock® PC Software for Technical Analysis
MetaStock® is a powerful technical analysis software program for your personal computer. It offers more than 250 built-in indicators and line studies to enable you to explore a wide variety of methods. And it empowers you to build, back test, and optimize custom trading systems to suit your own particular requirements.

Click this link to save 7%-9% on MetaStock® software
.
Or, click the banner below for a one-month free trial.

MetaStock Software