The Trading Cockpit: How to Read The Gauges

Back in the late 1990s during the Clinton era, I was the editor of Rotor and Wing, a magazine that catered to the rotorcraft industry. I determined that the best way to bond with my readership was to learn how to fly.

Flying a helicopter is exhilarating, but heavy turbulence can be unnerving. I wasn’t afraid of flying. I was afraid of crashing.

I haven’t flown in years (it’s an expensive avocation), but when I sat down today to write a column about September’s seasonal stock market volatility, it dawned on me that there’s an analogy between the turbulence experienced by aviators and investors. You don’t throw up your hands and panic. You stay calm, read the indicators, and adjust your flight plan accordingly.

As we get battered by autumnal turbulence in the markets, are you afraid that your portfolio will crash? Below, I interpret the indicators on the financial instrument panel.

September’s choppy skies…

That’s a picture of me, about to take off in a Schweizer 300 helicopter. Back then, I had more hair.

For investors, September is historically volatile. It’s the only month that shows a decline, on average, over the past 100 years.

The great traders such as Warren Buffett govern their buying-and-selling activity through patience and the dispassionate application of value criteria, but they also observe crucial technical signs when the market is about to rise or fall.

Moving averages are key technical indicators. A moving average helps smooth out price data by creating a constantly updated average price. A rising moving average indicates that the security is in an uptrend, while a declining moving average indicates a downtrend. The shorter the moving average, the sooner you’ll see an actual change in the market.

The following charts depict data as of market close September 7.

The 10-Year U.S. Treasury Yield (TNX) is threatening to break out onto the upside. The benchmark hovers at 4.27%, well above its 50- and 200-day moving averages:

A rise in the TNX’s yield above 4.5% would be bearish for stocks. When yields go up, equities often go down.

The CBOE Volatility Index (VIX), aka “fear index,” has been rising and hovers above its 50- and 200-day moving averages, indicating an increase of stress and uncertainty in the markets:

The VIX still hovers below 15 (as of this writing on September 8), which is a hopeful sign, but it’s been inching higher in recent days. When the VIX rises above 20, you can expect volatility to be higher than usual over the next 30 days.

The SPDR S&P 500 ETF Trust (SPY) has dropped below its 50-day moving average, indicating a loss of momentum:

The SPY’s Relative Strength Index (RSI) hovers at about 49. The RSI measures the speed and magnitude of recent price changes in a security or index, indicating oversold or overbought conditions. Above 50, the RSI is bullish and below 50, it is bearish. At 50, the RSI is considered neutral. Accordingly, the S&P 500 seems to stand at an inflection point.

The New York Stock Exchange Advance/Decline line (NYAD) has been falling, indicating declining breadth:

The NYAD shows the number of advancing stocks minus the number of declining stocks. When major indices such as the S&P 500 are declining, a falling NYAD confirms the downtrend.

WATCH THIS VIDEO: Your Post-Labor Day Market Analysis

The main U.S. stock market indices eked out modest gains Friday, in volatile trading marked by sharp intraday swings. For the holiday-shortened week, they finished in negative territory as follows: The Dow Jones Industrial Average -0.7%; the S&P 500 -1.3%; and the NASDAQ -1.9%. The S&P 500 and NASDAQ snapped their two-week winning streak.

The U.S. economy and corporate earnings are showing surprising resilience and the long-term prognosis for stocks remains positive, but over the short term, you’ll have to ride out seasonal volatility and downward momentum.

Maintain ample cash reserves (about 15% of total portfolio assets makes sense now) and start to rotate toward more defensive sectors such as utilities and health care. “Growthier” stocks in such sectors as technology will soon come back into vogue, but we need to get the next Federal Reserve policy meeting (September 19-20) and the autumnal doldrums behind us.

Liquidity is the lifeblood of the stock market. Before a sustainable bull market can take hold, the U.S. central bank needs to stop siphoning away liquidity. Increasing the danger for investors have been robust economic reports, which have stoked fears that the Fed may hike rates again to fight inflation.

The good news is, you can still make money, in up or down markets, by heeding the advice of my colleague Jim Pearce.

Jim Pearce is the chief investment strategist of Mayhem Trader. Jim doesn’t worry about market mayhem…he methodically makes money from it.

Jim has developed an under-the-radar strategy to flip market mayhem into fast payouts. Want to learn more? Click here now.

John Persinos is the editorial director of Investing Daily.

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This article originally appeared on Investing Daily.