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This stock market is starting to look like that of a year ago — but it’s still too early to sell

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All of the major stock-market averages — the S&P 500
SPX,
-0.22%
,
the Dow Jones Industrial Average
DJIA,
-0.22%
,
the Nasdaq-100
NDX,
+0.04%

and the Russell 2000
RUT,
-1.85%

— traded at new all-time intraday highs on Monday and all but the Russell 2000 closed at a new all-time high as well.

In addition, we are in a period of bullish seasonality: the “Santa Claus rally” encompasses the last five trading days of this year and the first two of the next year. With that kind of momentum, we don’t want to fight it. The trend of the charts is still higher.

However, there is some weakening in the indicators, so we want to pay attention to that as well. First, the Santa Claus seasonal period — as defined by Yale Hirsch years ago — is normally bullish for the market. However, if it should turn out that the market declines over that seven-trading-day period, then usually January is a bad month.

The last times that the Santa Claus period ended with a decline were in early January of 2016, 2015, 2008, 2005, and 2000. All led to sharp declines in January, and two of them — 2000 and 2008 — were the beginning of severe bear markets.

For now, though, the S&P is moving higher. There is tentative support at the prior December highs around 3,720, and then there is strong support in the 3,630–3,650 area. That area has been a daily low for seven trading days so far this month. Hence, it is important support, for every time it is tested and holds, more and more people will rely upon it. If it is broken, there will probably be instant selling.

However, we are still viewing 3,550 as the more important support area, for if that were broken, then the S&P chart would take on a bearish aura.

Equity-only put-call ratios have begun to turn upward, and that is a sell signal. However, it is coming from such a low (overbought) position on the put-call ratio chart that it could merely be a reversion to the mean sort of move and not a strong sell signal — yet. It certainly will eventually be a strong sell signal, but we would want to see some confirmation via a price breakdown in the S&P before acting on this potential sell signal. There are so many analysts who seem to be aware of this overbought condition in the put-call ratios (just read an issue of Barron’s) that one thinks the massive call buying might continue for longer than expected — just to confound those who are already shorting the market based on this extreme amount of call buying. We will wait for confirmation.

Market breadth has begun to slip. This was the strongest indicator for the market’s most recent rise since the election. However, on Dec. 22, the breadth oscillators rolled over to sell signals. Those were quickly stopped out by an improvement in breadth on Dec. 23, but the warning shot has been fired.

These breadth oscillators have been very reliable indicators over the past few months, so — even at the risk of some whipsaw losses — we will be following their lead.

In “stocks only” terms, Cumulative breadth and cumulative volume breadth (CVB) have not made new all-time highs since Dec. 17, but that is too short of a time for them to be considered negatively divergent — yet.

New highs continue to dominate new lows in a spectacular fashion. This indicator remains bullish.

Volatility, while remaining high, has recently issued a new buy signal. On Dec, 21, S&P futures fell about 70 points in overnight trading on news that the coronavirus had developed a new strain, and the U.K. was imposing new restrictions. VIX
VIX,
+6.36%

spiked up nearly 10 points on that news — a seeming overreaction. As the day wore on, stock prices recovered and VIX began to fall. By the end of that day, VIX had generated a new “spike peak” buy signal.

That buy signal will remain in place for 22 trading days (until late January) or unless it is stopped out by VIX once again entering “spiking mode.” Coincidentally, the nearly 10-point rally in VIX on Dec. 21 took it almost exactly to its now-declining 200-day moving average.

Historical volatility has continued to drop, even while implied volatility has not. The S&P’s 20-day historical volatility is now down to 9%. A move below 8% would be an extreme overbought condition and would be the precursor to another sell signal.

The construct of volatility derivatives has remained bullish, too. The front end of the VIX futures term structure remains bullish in that January VIX futures (now the front month) are trading at lower prices than the February VIX futures. If that should invert, it would be an immediate sell signal.

In summary, the market seems to be setting up in a very similar fashion to year-end 2017 and year-end 2019. The euphoria of those periods eventually unleashed a nasty market decline in the following February.

It appears that the market can’t help itself and is likely headed for a similar result.

However, the momentum is still strong to the upside, so remain long and tighten stops, while rolling calls up to higher strikes if appropriate. Eventually, it will be time to short this market, but it’s too soon to do so right now. So we remain bullish, but will certainly trade sell signals when and if they occur.



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‘I could live on my Social Security and still save money’: This 66-year-old left Chicago for ‘calming’ Costa Rica — where he now plans to live indefinitely

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Editor’s note: This article was first published in September 2019.

A school break changed 66-year-old Martin Farber’s life forever.

In 2007, his daughter — who at the time was attending Illinois State University — decided she wanted to spend a college holiday volunteering in Costa Rica and staying with a local family, he explains. She came home raving about the experience, so, in 2008, Farber — who at the time was living in Evanston, Ill., just outside Chicago, and selling cars — took his first trip there.

“It was a big surprise to me — bumpy roads, dogs barking in the streets,” he says. “I wasn’t enamored at first.”

But as his daughter began traveling there more and eventually moved there for a year, he took additional trips to Costa Rica. It quickly grew on him — in particular, the people. “The Costa Rican people are warm, open and friendly. I felt less invisible in a strange country in a strange town where I didn’t speak the language than I did in Evanston.”

And the more time he spent there, the more it impacted him: “On one of my trips there, I thought: My daughter’s life makes more sense than mine,” he says. “There was nothing wrong with my life, but I felt that my life was out of context with who I’d become. … I would have bills and make money to pay them, but that had ceased to be satisfying,” he recalls. “I knew I needed to change my life — there was no more joy in what I was doing.”

What’s more, when he’d return from his Costa Rica trips, people noticed. “I would come back, and my friends and therapist would say: You seem better after you go,” he says with a laugh.

A view from the hot springs near Martin Farber’s home in Costa Rica.


Martin Farber

So in 2014, he packed up and moved to Orosi — a picturesque, lush small town with waterfalls and hot springs a little over an hour’s drive from San Jose — promising himself he’d stay for two years. It’s been five, and he now plans to stay in Costa Rica indefinitely. (Though Farber notes that, to him, “it’s not a retirement; it’s a chance to lead a new and different life.”)

Here’s what his life is like, from costs to health care to residency to everyday life:

The cost: While many expats spend way more living in Costa Rica, Farber says: “I could live on my Social Security and still save money.” He says “a person can live on $1,200 per month, two people on $2,000.” The key, he says, is to live more like he does and as the Costa Ricans do — in a modest home, eating local food and purchasing local goods.

Indeed, Farber himself spends just $300 a month for rent (he rents a home from a friend who moved recently and gave him a good deal), roughly $225 a month on groceries and just $50 a month total on water and electricity (the temperate climate in Orosi means you rarely need heat or air conditioning). The veteran Volkswagen
VOW,
+0.96%

 
VLKAF,
+0.98%

salesman saves money by not owning a car (those over 65 ride municipal buses for free), which can be a significant expense in Costa Rica; for his cellphone, “I pay as I go … roughly $10 may last me a couple weeks or more,” he says, adding that “many people handle there their cellphones this way. You can get them recharged anywhere.”

His major expense is travel: He goes back to the U.S. to visit his mother in Florida several times a year and lately has spent part of the summer in Chicago helping out a friend with a dealership there. He also spends a good amount of money on health care. He says that while flights can be had for as little as $350 roundtrip during offseasons, the cost can be much higher the rest of the year.

In the saddle.


Martin Farber

Health care: Farber, who has permanent resident status in Costa Rica, says he pays about $90 per month to participate in the country’s health-care system — adding that the health care he’s received has been very good. (A 2018 study of health-care quality and access in more than 190 nations ranked Costa Rica No. 62.)

When he developed a detached retina, though, he paid for the procedure out of pocket so that he didn’t have to wait for the required surgery, he says — adding that the entire procedure cost him about $5,000. “I would have had to have waited four days,” he says, if he had not paid to expedite matters. “That might have been fine, but it might not.” And he adds that the quality of care depends on where you get it in the country.

Lifestyle: Though Farber says that he “moved here with no goals and no agenda,” he’s found plenty to do. “I take Spanish lessons two days a week for two hours a day. It’s been great. I never thought I would acquire a usable language in my 60s,” he says. He also rides his bike all around the area, does some writing and belongs to a community group that undertakes projects to improve the area.

And he often simply takes in nature, which he says has been an essential part of why he feels calmer and more relaxed in Costa Rica than in the U.S. “I live at 3,000 feet but in a valley surrounded by coffee fields and lime trees and water. At night, if I open the windows, I can hear the river rushing by,” he says. “It is very calming … hundreds of trees everywhere … you know the Earth is alive.”

The historic Iglesia de San José de Orosi.


iStock

Cons: “I don’t want to overglorify. It’s not without its problems,” Farber says of Costa Rica. “There are social problems and downsides.” He notes that crime and petty theft can be a problem (“I am cautious,” he says of his approach) and seem to have increased since he moved there, and adds that he misses out on some cultural things because of where he lives. And, he says with a laugh, “I can’t order Thai food at 9 at night.” But, he adds: “These are trade-offs — in the afternoon, I get to walk in the coffee fields and see flocks of parrots.”

Residency: To qualify for Costa Rica’s pensionado visa, expats must prove that they have a pension of at least $1,000 coming in each month. (Here are the details of that program.) Once you have lived in Costa Rica for three years, you can apply for permanent residency. Farber used a lawyer to help him figure out the ins and outs of residency options; his entire path to permanent residency took about a year, he says.

The bottom line: “After five years I am still amazed and surprised that I made the decision to lead a life I never thought I would,” he says. And while he may not stay in Orosi forever — “the town doesn’t have an ambulance, [and] I don’t know what it will be like to be 80 there,” he says — he does plan to stay in Costa Rica in no small part because of the people and sense of community. “I have the feeling that life is good here,” he says. “It’s hard sometimes, but we are all in it together.”



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Mutual Funds Weekly: These money and investing tips can help you read the market’s signs and stay on your path

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