Daily Chart Sell Signals in SPX, NDX, and DJIA at Friday's Close

Daily chart sell signals were triggered by my computer trading system in the S&P 500 Index (SPX), the S&P 500 ETF (SPY), the Nasdaq-100 Index (NDX), the Dow Jones Industrial Average (INDU), and the Dow Jones Industrials ETF (DIA) at Friday's close, October 30th.

In the interest of full disclosure, I have now allocated 50% of my assets under management to a short position in the S&P 500 Index. The remaining 50% has been allocated to "Cash" and a modest long position in medium-term blue chip corporate bonds.

The price action in U.S. stocks following last Wednesday's FOMC announcement was nothing short of incredible. I've seen many short squeezes in my career as a trader, but Wednesday's last hour rally was clearly one of the strongest given the relatively hawkish news from the Federal Reserve (a December rate hike is definitely still on the table, according to Fed officials). Of course, in my view, there is NO CHANCE now of an interest rate hike from the Fed this year. Now it's just a question of whether or not there will be a hike next year!

If the Fed doesn't hike interest rates any time soon, isn't that bullish for U.S. stocks? At this point in the economic cycle (i.e. almost 80 months into an economic recovery), maybe the Fed will soon have to find a way to EASE monetary policy to fight the next recession, which I think is on the near term horizon. If the Fed actually eases monetary policy (with negative interest rates or another QE program), won't that be bullish for stocks? I guess everything depends upon how deep the next recession is and to what extent corporate earnings will suffer. Since I am bearish on U.S. stocks in general and short the S&P 500 Index specifically (without a hedge), then I clearly think the economic negatives immediately ahead will outweigh anything the Fed can do, at least temporarily.

My greatest fear as a short-seller is the potential increase in central bank purchases of U.S. stocks. I strongly suspect that central banks in Japan, China, and Switzerland already have significant positions in global equity shares (including U.S. stocks) on their balance sheets. And Mario Draghi has said that all assets, except gold, are being considered for purchase in the ECB's current and ongoing quantitative easing program. I guess the $64,000 question has to be now: "Are central banks omnipotent?" So far in this 6 1/2 year recovery, the answer has been mostly yes! With my current short position in the SPX, I obviously think that the "intimidation" factor of central bank omnipotence will be severely tested over the next several months!

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

Is There A Message In The Latest VIX Buy Signals?

In modern day portfolio management, if a respectable manager said he was 40% long U.S. Stocks, most would say that this a "defensive posture". 

And what would most Wall Street analysts say about a portfolio manager who was 40% short U.S. Stocks? They might say he was a crazy man who will soon lose his job!

To me, the risk associated with 40% long is almost the same as the risk of being 40% short, especially if you used the SDS double-short S&P 500 ETF as the primary bearish trading vehicle. With the double-short SDS, a 20% portfolio allocation gives you the equivalent of a 40% overall short position. And because you are actually LONG the SDS ETF, you can never lose more than 20% of your total portfolio, even if the S&P 500 Index vaults to infinity overnight!

Of course, if the S&P 500 Index rallies sharply, as it did this past Thursday & Friday, you are going to lose money with your SDS bearish S&P 500 position, as I did with mine.

Bearish traders and investors sustained heavy losses late last week, but I still think the next big swing in U.S. stock prices is to the downside. 

Here is an interesting chart of the VIX, where three daily chart buy signals have been triggered by my computer trading system over the last five days. If my computer trading system is right, there is about to be a fairly significant uptick in stock market volatility. Sharp increases in the VIX are almost always associated with major downturns in actual stock prices. 

VIX Daily Chart with Computer-generated Buy & Sell Signals