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Zweig’s Rules: Don’t Fight the Fed. Don’t fight Market Momentum. Worry if you’re not worried.

By Joe Duarte on October 15, 2017

Some things never go out of style and among them are the methods of great investors of the past.

Martin Zweig was a legendary investor, fund manager, and newsletter writer who used three simple rules to make his fortune. The first two are – “don’t fight the Fed and don’t fight market momentum.” Simply stated, periods of low interest rates will drive stocks higher, and the higher stock prices move, the more money will come into the market adding to the bull market. The flip side is just as relevant. Higher interest rates will hurt stocks and once the selling starts it can only accelerate. Investors who go against these two simple rules will lose money.

How good was Zweig? Well, aside from making lots of money for those who followed his advice over the years, his claim to fame was telling investors during the old “Wall Street Week with Louis Rukeyser” show on October 16, 1987 that he had sold the market short. Of course, on October 19 the market crashed and Zweig’s legend was cemented.

Unfortunately, Martin Zweig is no longer with us. But if he were, he might be telling us all again not to fight the Fed or market momentum. Still, he was no fool, which is why his third rule “I’m most worried when I’m not worried,” meant we should never let our guard down in any market. Perhaps this rule is most worthy of keeping in mind during this robot algorithm steady climb to higher highs on a frequent basis.

NYAD New High

The most accurate indicator of the past several years, the New York Stock Exchange Advance Decline line (NYAD) is still making new highs, which until proven otherwise is a signal that the market is still going higher, although it’s difficult to know how much longer it can keep up this advance without a pause.

This technical picture is one of a market that has not reached an extreme yet, but may be close to reaching such a point. ROC is flat suggesting momentum can still turn higher

SPX at Decision Point

The NYAD is pointing toward higher prices but the S & P 500 (SPX) is more in a wait and see mode. This is illustrated by the neutral leanings of the Accumulation Distribution (ADI), On Balance Volume (OBV) and ROC indicators. Some of this has to do with the pullback in the oil and transport stocks over the last few weeks as both of these groups had given SPX a nice broadening boost.

Transports and Energy Pause

The traditional leadership in the stock market over the last few years has been the technology sector. However, over the last couple of months a robust rally in the energy and transportation stocks along with the housing and construction sectors has given SPX a much broader base. This has translated into the post election rally lasting much longer and going much higher than most in the market had been expecting.

But as the charts above and below illustrate both the Dow Jones Transport Index (TRAN) and the Oil Index (XOI) may be losing steam. This may account for the neutral looking S & P 500. Of the two, the transports look to be the weak link in the chain as the ROC indicator is signaling a loss of momentum and the ADI indicator suggests there are now more sellers than buyers. Still OBV suggests the buyers haven’t given up yet, which means we may actually see a consolidation in the transports and not an all out selling spree.

The energy stocks are showing a bit more resilience, although the jury is still out on which way things will break here. Subscribers to my service recently took profits in the energy sector and I personally am waiting to see what’s next. The most worrisome aspects of this chart are the overbought RSI indicator and the down trending ROC. As you can see the last time these two indicators looked similar was in December 2016, right before a nearly 30% decline in the oil stocks.

Sector Selectivity Remains the Key to Success

Some investors fail to review history and pay the price for their folly. Thus, to investors unaware of Zweig’s rules, the current rally seems extraordinary. And while it is so in many ways; aside from the presence of robots as the dominant movers of money in and out of the market, Zweig’s rules still apply, as record low interest rates continue to fuel the market’s upward momentum.

Still, every market is different and there are no guarantees, so investors should adjust their approach while sticking with the big factors influencing the overall dynamic of any period of time. In this market being selective and being willing to take profits after sizeable short term gains has been a very profitable combination. Since I haven’t stopped worrying, and I don’t like to fight the Fed or momentum, I continue to own stocks. I’m staying long ETFs and stock call options, but I am keeping one foot in the door, just in case. After all, all good things eventually come to an end.

A couple of weeks ago my paid subscribers took sizeable profits in the oil stocks after holding them for a few weeks. This week I’m featuring a new sector that I think has the same type of high profit, low risk potential in the short term.



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