The Case for Cautious Optimism Part 1

When it comes to evaluating this market, looking at stocks on an equal-weight basis can give you a clearer picture.

   

Video Transcript

Part of the reason why we’re still cautiously optimistic in SlingShot Trader as we get closer to sequester at the beginning of March, why we’re still willing to evaluate some bullish positions, I want to show you two charts to make my point.

The first one is the Rydex S&P Equal Weight ETF (NYSEARCA:RSP). For those of you who may not be familiar with it, it’s an equal weight index, which means that from the largest stock in the S&P 500 to the smallest stock in the S&P 500, they represent the same percentage of the RSP. It’s 0.17% or something like that.

So, you’ve got, I think, a better representation of what’s going on out there. It’s not so overweight to things like Apple (NASDAQ:AAPL), Chevron (NYSE:CVX) and some of the bigger components of the S&P 500. On the chart in the video, you can see the trend is really stable and it looks really good.

In fact, if anything, one of the things I always look for on a trend like this to give me a head’s up as to how stable or unstable it might be getting is what’s going on with the average daily range, or sometimes we refer to it as the average true range, which is a modification. It doesn’t look at just one day; it, basically, looks at the extreme price between two days, so it’s a technical indicator.

If I apply that in this case, we expect it to be relatively flat or low in a bull market because trading ranges tend to calm down. Traders just aren’t very stressed.

On the chart in the video, I show you a 14 period average true range. You’ll notice during periods of time when the market is bearish, like May and June 2012, the range begins to widen out quite a bit and, in fact, it starts to climb even before the market really starts to shift very much. That was definitely true here displayed on the RSP going into even March and April 2012 before the bigger declines.

So, the RSP is definitely a relevant indicator for us to look at and, right now, it’s just not flashing that many warning signs. In fact, if anything, the range right now is so low, we haven’t been to these levels since the last time the market rallied through December. So, if we did get another spike where the market shot down really quickly just temporarily and then began to move back up, that wouldn’t be a big surprise. So, we might want to use that as an opportunity to buy on some dips, even continuing to buy calls if the downturn doesn’t look too severe.

Look for Part 2 of why we remain cautiously optimistic about this market.

Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.


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