Special Update: U.S. Stock Market - Nirvana? Or Time To Be 100% Short?

In my last column dated Sunday, August 17th, I disclosed that I had executed 25% of my overall planned short position in the S&P 500 Index late Thursday, August 14th and another 25% on Friday, August 15th. Today, August 19th, I completed my planned short position by executing the remaining 50%. For trading purposes, I like to use the ProShares UltraShort SDS ETF when attempting to capitalize on any expected downturn in the S&P 500 Index. This product is extremely liquid and  has a nice "kick" to it when the trade goes your way. 

For bullish traders and investors, today's NYSE afternoon close has to be "nirvana" with the Nasdaq Composite Index now at its highest level since March 2000 (which was arguably the greatest stock market top on record). Apple posted a record closing high today, eclipsing its previous high set in September 2012. However, it may be noteworthy that the record intra-day high for Apple from September 2012 was missed by a few cents today. No worries, though, as I am sure the new iPhone will be great. Home Depot jumped 5.55% today on better-than-expected earnings and a positive outlook from management for the next several quarters. And most major stock market indexes are now within a stone's throw of their all-time highs as set last month. Like I said, nirvana is a perfect description for the feelings that bullish traders and investors must be experiencing right now.

And maybe there will be a couple of more days of this bullish glow and nirvana-like feelings, but the tide has already turned and the expected downturn in the U.S. stock market will be sharp and swift. In 1987, the high for the year in the S&P 500 was posted on August 25th. There are three more trading days this week before Monday's August 25th anniversary date. Do the bulls even have this much time (three days) before the expected market slide begins? Probably not!

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market: Heroic Price Action

On Friday, August 15th, the U.S. stock market was nothing short of "heroic" in the face of more potentially disturbing news from Ukraine. While this latest report was less than clear, the pro-western central government in Kiev announced that a Russian military incursion into Ukraine's sovereign territory had taken place and that Kiev military forces completely destroyed these Russian forces. The U.S. stock market was nicely higher in first-hour NYSE  trading on Friday, but then plummeted on this news. By noon eastern time, the S&P 500 Index had fallen about 1.1% from its morning high before finding meaningful support. At that time, the Russian Government then announced that Kiev's version of the latest military landscape in western Ukraine was pure "fantasy", and that no Russian military incursion had ever taken place. The S&P 500 Index then rallied back to unchanged on the day. Most major U.S. stock market averages gained between 1% and 2% last week, with the Dow Jones Industrial Average lagging slightly with only a 0.66% gain.

In the interest of full disclosure, for my managed accounts I executed 25% of my planned short position in the S&P 500 Index late Thursday and the second 25% in the first hour of trading on Friday. I consider myself extremely fortunate to have covered 100% of my shorts the previous Friday, August 8th, and last week's rally allowed me to re-establish a 50% position at excellent prices relative to one week ago.

In my humble view, the bearish and bullish cases for the U.S. stock market haven't changed very much. The bulls point to solid 2nd quarter corporate earnings and a relatively friendly low interest rate environment, among other positive factors. The bears point to historically high stock market valuations, global unrest, a Fed that appears to be scaling back its stimulus, and other negative technical factors. 

When I was the Editor and Publisher of the Sutton Advisory Letter for the 10-year period between 1988 and 1998, I penned more than 2,500 daily and weekly advisories. I know from that very personal experience that I could easily make a convincing bullish or bearish case whenever I needed to support my forecast at the time. While I rarely gave away my key forecasting tools, my successful forecasts over that time period were almost always tied to two or three market factors that stood out from the rest. And there was no shortage of "strong hunches" in the mix that were based upon decades of experience.

So where do we stand now? Are there two or three factors that stand out now? Or maybe even a "strong hunch" in play here? Unfortunately, the answer to both questions is NO. All I have is my computer trading system and its monthly chart sell signals as triggered in most major U.S. stock market indices at the end of July. For me, that's all I need !

NY Composite Index Monthly Chart with Computer-generated Buy & Sell Signals

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

S&P 500 Index Monthly Chart with Computer-generated Buy & Sell Signals