Everybody take a deep breath. It's froth speaking here and I want your money. I can take it, because you are having too much fun buying stocks in flying cars and body building outfits and anything else that hits your desk and you think it will work.
Look, I am a slave to the S&P's Oscillator, which I pay a ton of money for, and it reached 5 last night, the overbought level that I have sold some stock by rote since 1987. When it gets that high it is not often the top. But I respect it.
When the oscillator -- again, proprietary to the S&P company -- trades between 0 and 5, that's fine. No excess buying. Above 5, it gets risky and we would work to "flatten" our book, meaning take down exposure or, if you still want to buy something you have to sell more than you need to buy it.
At plus 10, it's full stop sell. You can't add a thing. Try to get down to as little exposure as you can without incurring huge capital gains taxes. (Remember, I am running a charitable trust, if I take a profit it goes out the door to charity.)
By the way the inverse is true, too. Again, nothing is in play from zero to minus five. But at minus five, you have to hold your nose and buy and begin to cover even the best of your shorts. At minus 10, you have to be as close to 100% long as possible with a little overage in case something comes up or you get one more gasp down.
Now, because I play with an open hand for ActionAlertsPLUS, you are seeing this play out in real time. It's one of the reasons why I love the club. We are making small adjustments apropos of my last club call.
I am sure some of you are wondering how I can be so on autopilot for this.
Because I have studied it more than everyone else perhaps?
With any indicator you can have false positives. Many times I will have left money on the table as we soared from plus 5 to 10 and beyond. But many, many, many more times when I looked back --and I do that repeatedly because I am am obsessive -- I know I should not have been buying; I should have been waiting. As it went higher still, I should have just been selling even some of the crown jewels, because it is such an obvious omen of overenthusiasm.
On the downside it's pretty incredible, too. I can say that other than in 2007-2009, you had to buy no matter what. It flagged the Covid March bottom, it flagged the VIX crash bottom soon after the Eagles won the Super Bowl in 2018, it flagged the Chinese crash bottom of 2015, and it caught the flash crash and the S&P U.S. bond downgrade. I could go on and on back to the Gulf War bottom in 1991 almost to the day.
Tops are harder, because things can stay toppy for a long time. That makes this moment so hard for me, because I want to put money to work in some names that have been hammered.
But discipline says take the money off first. That's where we are.
When was the oscillator wrong? Oddly in the first year I used it the stock market crashed. What people forget is that the crash occurred after one of the worst weeks ever and the oscillator, I thought, was flashing buy. But you had no time to react, because that was after Friday's close. So Monday you should have been buying.
We had no idea what the prices were and stocks like Caterpillar (CAT) were being traded between $50 and $70. We didn't have a lot of company buybacks back then -- the notion of a big, regular buyback, to stabilize and take out shares had been something some companies did but it became the norm for many after the '87 crash, because you need someone to establish order in your stock.
And the other time? That would be 2007 to 2009, when the readings were relentlessly below minus 10. But if you did it, you were crushed, because we had systemic risk then, not financial risk or political risk or whatever other risk you want to bring up.
When you have systemic risk, it means that the center might not hold and what you are trading may be worthless, which was the case for a half dozen of the biggest stocks in the market. Too much leverage, too many buyers of things that were related to bogus mortgage bonds, the worst decline in the history of the other store hold of value -- your house coupled with a credit crunch that the Fed misread -- they know nothing. It's what made me come out and say that If you have money in the market that you might need for the next five years, take it of the market. When I said it, the market really fell hard and my late colleague Roger Ailes, so angry at me for leaving Fox, savaged me by saying I caused the top.
Hey, I was just looking at the oscillator, Rog!
So, there's my take on what is happening. I am not going to sit around and let Mr. Froth take his pound of flesh.
Tell me when he's done eating. Oh, never mind, the S&P oscillator will take care of that.