The common phrase “red sky at morning” is a line from an ancient rhyme often repeated by Mariners:

The rhyme is a rule of thumb used for weather forecasting during the past two millennia.

He answered them, “When it is evening, you say, ‘It will be fair weather, for the sky is red.’ And in the morning, ‘It will be stormy today, for the sky is red and threatening.’ You know how to interpret the appearance of the sky, but you cannot interpret the signs of the times. Matthew 16:2-3

It is based on the reddish glow of the morning or evening sky, caused by haze or clouds related to storms in the region. If the morning skies are red, it is because clear skies over the horizon to the east permit the sun to light the undersides of moisture-bearing clouds. The saying assumes that more such clouds are coming in from the west. Conversely, to see red clouds in the evening, sunlight must have a clear path from the west, so therefore the prevailing westerly wind must be bringing clear skies.

There are occasions where a storm system might rain itself out before reaching the observer (who had seen the morning red sky). For ships at sea, however, the wind and rough seas from an approaching storm system could still be a problem, even without rainfall.

Because of different prevailing wind patterns around the globe, the traditional rhyme is generally not correct at lower latitudes of both hemispheres, where prevailing winds are from east to west. The rhyme is generally correct at mid-latitudes where, due to the rotation of the Earth, prevailing winds travel west to east.

from Shakespeare’s Venus and Adonis

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“If you can keep your head when all about you are losing theirs…Yours is the Earth and everything that’s in it” Rudyard Kipling

“Veritas Nunquam Perit”- “The Truth Never Perishes” Seneca (the younger)

“It was never my thinking that made big money for me. It always was my sitting. Got that? My sitting tight!” J. L. Livermore

“Simplicity is the trademark of genius.” Robert Sharma

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Current Trading Position:  +90%

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Primary Trend: Bear Market

Intermediate Term: ~ Seven Sentinels 7/0 Uptrend, 5-07-18, SPX 2634

~ STS 3/4 Uptrend – 5-8-18/Close – SPX 2672

Tracking Account Valuation 1,712,487 +23% YTD 2018 Vs. SPX +4% YTD – Outperforming SPX By +19%

Trading Position: 40% UDOW, 50% TNA, 10% Cash

Trades Friday: BUY 40% UDOW, 50% TNA

STOPS: UDOW 94.49, TNA 84.55

Beta Testing: VSTS- Options & Futures –7/0 U/T 1:20 PM BUY Signal- Fri, June 8- Long SPU 18 @2774/ Stop 2661.75

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{If you just want the “*Cliff’s Notes, skip to the bottom of the page.}

The 2018 Market is bipolar (we called it “manic-depressive” when I got my Psycholgy Degree )- and so it will continue to be in months ahead. You may recall that the Seven Sentinels produced a SELL Signal on Friday, February 2, 2018. In our weekly article “Veritas Nunquam Perit” (Truth Never Perishes), we said:

“But here’s the good news. The market is telling us, after monitoring and properly weighting each and every one of those 100,000 factors, the bottom line: the current trend. Our HTTs, and more importantly, our STSs, and most importantly of all, our Seven Sentinels reflect back to us in a very direct readout- the current trend of the market- the line of least resistance. Our job is to align our trading position with that LOLR- the TREND. The market, then, will do the rest.

HTT and STS are each 0/7 Downtrend.

Below are the Seven Sentinels, also 0/7 DOWNTREND based on Fridays closing readings:”

We followed our own trading rules, and by April 13, 2018, our tracking account was +16% YTD per our weekly reporton 4-15:

“STS UP/SS UP = 0% to 100% LONG

Primary Trend: Bull Market

Intermediate Term: ~ Seven Sentinels Uptrend 5/2, 4-13-2018, SPX 2654

Tracking Account Valuation 1,611,797 +16% YTD 2018 Vs. SPX -0.5% YTD”

But as we see in that report, the Seven Sentinels (daily) had moved back to BUY SIGNAL on April 13. We then, as we let the market make the calls, said:

“Those who have been us for a while all know that we have repeatedly said that our trade is not guided by news, opinions or expectations– not even our own. At SevenSentinels.com, the market rules and is the ONLY directive for our trades. No matter what we may otherwise expect, we trade with the TREND of the market- The Line of Least Resistance.

And we rely on the highly accurate LOLR read provided by our Seven Sentinels (based on daily data) and our Short-Term Sentinels (STS- 2-hour data) to identify the TREND and to keep our trade in sync with that LOLR…

We were surprised, frankly, to see that on Friday all Seven Sentinels closed in individual uptrends and produced a Seven Sentinels BUY Signal:”

The market went through two more trend changes (via the daily SS) between then and May 8, but since that latest May 8, Seven Sentinels BUY Signal remained in an Intermediate Term BUY Signal. We have continued to trade via our rules:

“When the STS is in uptrend mode (as it is now) then our positions can only be cash or long ETFs or a combination thereof. Here is the other guiding rule for STS uptrends:

1. If the Seven Sentinels(daily) are DOWNTREND, we must be between 0 to 50% long upside ETFs.

2. If the Seven Sentinels are UPTREND, then we need to be between 0% and 100% long upside ETFs.”

And as of Friday, June 8, 2018 close, we are long 90%, and the tracking account is +23% YTD due to trading with and only with the line of least resistance as defined by our trend signals.

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But all that is history. The trend this year is heading for an even more dramatic set of trend changes and some spectacular moves. Very fortunately, though, continuing to trade with and only with the line of least resistance primarily provided by the Short-Term Sentinels is expected to keep us far out ahead of the SPX. In fact, as we trade short in a declining market, our outperformance becomes exponential as our equity grows while SPX declines.

In February, both our weekly and even our Monthly Sentinels produced SELL Signals, warning then, far before any on “the street” even mused about such a thing; markets had entered a Primary Bear Market:

Weekly Sentinels:

Monthly Sentinels:

These Long-Term PRIMARY Trend Bear Market signals which both came at the dawn of 2018 were the first glimpse at that “red sky in the morning.” Since then storm clouds have been gathering in the form of indications that inflation is about to flare:

And interest rates are rising and close to a flash-point:

We won’t venture into political risks that are bubbling on the surface. Politics are intensely personal and emotional, and we do not want to make any statements here that would appear partisan or offensive to any. The fact is that we do NOT look at any developments from those angles anyway, especially as connected to our mission at Seven Sentinels. We only point to the risk that there could be disruptions ahead that will reverberate through the economy and the markets negatively.

An additional significant drag on markets is coming from the Leaders of the 2016-2018 Bull Market, four issues known as “FANG.” These are Facebook, Amazon, Netflix, and Google. Here is a chart of FNG, an ETF that is composed most heavily of these four, where we see that this FANG group peaked and has been declining since November 2017. Ultimately, as goes FANG, so goes the entire NASDAQ:

But now let’s bring the gathering storm to a much closer level and examine the primary driver of our trading position- the Short-Term Sentinels. While the Intermediate-Term Seven Sentinels are in an uptrend and the very short-term sentinels (VSTS) are in an uptrend- both at 7/0, the primary driver of our position, the short-term sentinels (STS), while also on uptrend are now just three up and four down.

Here are those seven at Friday’s close. Note that NYMO, NAMO, NASI, VXN are all in downtrends while just NYSI, BPCOMPQ, and SVXY are in uptrends:

All trends are up and we remain positioned as dictated by our rules- and our tracking account is at its peak for the year as the uptrend has been pushing our ETFs to new highs. But when the trend changes, so will we.

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So here’s the bottom line or as we like to call it, the

“*Cliff’s Notes”:

Let’s enjoy this uptrend while it lasts. We are doing so as we are 90% long triple leveraged ETFs and we are +23% YTD. But keep an eye on that red sky, as the behavior of this market will change dramatically in weeks, days, hours, or even minutes ahead. Those who stay long when the market turns down will face a destructive tropical cyclone, and many will not survive at all.

But here’s the excellent news: when the trend changes, so will we. And there is no more profitable trading market for shorts that a category five hurricane. The Seven Sentinels will tell us when that change has occurred and our rules (not our opinion) will dictate our position in the market.

We will have a pre-opening analysis at 9:15 AM as we recap Futures, Momentum issues, RUT, and VIX and summarize our market outlook heading into Tuesday. We’ll then update at 11 AM, 1:30 and 3:45 PM tomorrow, and track internals on Twitter throughout the day.