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May 30, 2023

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The artificial intelligence mania accelerates.

Fundamentally, the Fed’s tight-money policy is producing high interest rates, a shrinking money supply, balance sheet losses, bank failures, restrictive lending standards, falling prices for commercial real estate, rising bankruptcies, some 100% stock-price losses, an economic slowdown, and a probable recession just ahead.

Technically, the indicators reflect accelerating strength for a few big-cap technology stocks but glaring bearish divergences for everything else. The stock market is not nearly as strong as the large-cap weighted S&P 500 and Nasdaq 100 indicate. This is a very big problem and a clear warning that the stock market is not on a firm foundation.

Sentiment for the stock market has turned more mixed, with some indicators now neutral to moderately bearish and even bullish. For most of the past 17 months, since January, 2022, there have been relatively high proportions of bears. Since the stock price lows October, 2022, unwinding of bearish sentiment resulted in a squeeze on underinvested portfolio managers and short sellers, with forced buying. Now, that source of buying demand is winding down. For practical purposes, The Art of Contrary Opinion is difficult to apply, and its actual track record does not support high confidence as a reliable component of an investment strategy. 

A very few large-cap technology stocks, especially those with some claim to the recently-emerged artificial intelligence mania, are masking badly lagging performance for the broader market of stocks. History shows that wildly-popular fad stocks can turn suddenly, losing favor in an instant, and giving unwary traders little time to take defensive action before suffering large price losses. Meanwhile, even for the big-cap indexes, the market’s upside momentum is not as strong as it has been during previous upswings since the low last October, as seen by lower peaks for RSI and PPO, two of the most widely-followed short-term momentum indicators.

A market lacking solid technical and fundamental foundations can rise for a time, only to reverse suddenly to the downside.

Meanwhile, all of our clients are safe and protected from large losses. If you want to earn reasonable returns while avoiding large losses, move your wealth to our professional fiduciary asset management. We always put our clients’ best interests first, and we are always here to help you in times of stress

The S&P 500 stock price index (symbol: $SPX) is the most important and widely-followed technical indicator, against which all other indicators are compared. As the simple line chart of closing prices only shows, the S&P 500 broke out to its highest closing price since last August. RSI and Percentage Price Oscillator (PPO is an improved version of MACD, the Moving Average Convergence/Divergence Oscillator) short-term momentum indicators clearly are lagging, however. This month, as $SPX surpassed its early February peak, both RSI and PPO lagged below their peaks of mid-April and early February, signaling bearish momentum divergence. On-Balance Volume also signaled bearish divergence in mid-March when it fell to a new low, and it has been lagging ever since. And in this month of May, On-Balance Volume fell below and remains below its April lows while $SPX rose to a 9-month high, signaling a glaring bearish divergence. The $SPX price has been supported by a few big technology stocks, by demand from systematic trend following, by extreme bearish sentiment, by rebalancing of underweighted equity portfolios, and by short-covering—but now with sentiment moderating and without indicator support, the $SPX price uptrend is not on solid ground.

The S&P 500 stock price index is capitalization weighted, so the largest companies have an outsized influence on it. The Invesco S&P 500 Equal Weight ETF (RSP) corrects this bias in favor of the giants by giving the same weight to every stock in the S&P 500. Here we note a large bearish divergence since February compared to the $SPX, as RSP lagged far below its February high, confirmed by relatively weak readings for RSI, PPO, and On-Balance Volume. With the 50-day SMA now only slightly above the 200-day SMA (Simple Moving Average), a systematically bearish crossover is probable if price continues to sag lower.

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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.

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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.

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
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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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"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."
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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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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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