Saturday, August 28, 2010

The Day of Reckoning is Getting Closer

Although Friday's bounce in equities relieved some of the oversold bias, the trend remains down and indicators continue to point toward weakness. Today, it seems that "everyone" is a technical analyst, pointing to multiple "head and shoulders" index patterns as well as scary warnings such as the "Hindenburg Omen." With the plethora of fear-raising technicians, one could suspect a continuation of Friday's rally at least into month-end (Tuesday). Waning, directionless trading for the balance of the week as the long weekend emerges feels likely.

Peter Stolcers, who we follow regularly and has significant street experience is looking for a "major market decline that will start this week and continue throughout September."  We consider this a bold call but will not take it lightly as Peter has a great penchant for calling the shots in equities.

Most of our charts in the Market Tour remain the same, despite the bounce and recovery to major support levels. However, we have seen these bounces before, as they appear to be yet another reflex rally during a bear market. Of our many indicators, only VIX saw a modest improvement, as Friday's rally pushed its RSI back below 50 (a modestly-bullish signal). Runner-up is our NYA McClellan Oscillator, which pushed slightly above its EMA 20 (although on the downside, NYA Summation Index has fallen below 400 - a bearish signal -- while a bearish cross below its EMA 20 has ensued).

Should a selloff transpire, we wonder if Financials (XLF) will outperform this time around (beware, they still will fall with the market, just less so).  Looking back at weekly charts over the past 5 years, XLF is showing positive price relative performance in its RSI (higher RSI bottoms as price has fallen), and would be a likely contrary candidate to outperform (as it has so vastly underperformed on price since the April peak).

Treasuries took a big hit as the "risk-off" trade flipped over on Friday. With the crowds beginning to speak of a "bond bubble," once cannot ignore the possibility that a modest correction won't be followed by a continuation in the uptrend in Treasury prices. It appears that the Fed will keep a lid on rates for a while, which may help to sustain the relative strength in this asset class.

Click here for the updated Market Tour on Stockcharts.com.

Saturday, August 21, 2010

Neutral-bearish perspective

Equities continue to weaken with only subtle signs of an oversold market. However, an encouraging partial recovery toward the market close on Friday 8/20 bodes well for a bounce early next week.

On an intermediate-term basis, several of our trend-following indicators turned negative with this week's decline. Breadth measures remain bearish. Volume on the downside has edged out volume on up-days (even though volume in general is typically muted this time of the year).

Financials continue to show significant relative weakeness vs. SPX.  Partly offset by improving relative strength in the Nasdaq, a rebound in financials is important to drive a resumption of a sustained uptrend in equities. Price relative continues to favor staples over discretionaries, another sign of the "risk-off" trade, as well as the recent weakening of small cap stocks relative to large caps.

Although we may hedge short positions this week, we will view any concerted market uptrend as an opportunity to add to shorts.

Click here for the latest update on StockCharts.com.

Thursday, August 19, 2010

Equities not yet oversold

The red signals as noted in last weekend's post were reinforced today. One of our indicators (also one of John Murphy's favorites) is the relationship between the 13 and 34-day EMA.  Today we saw the 13 cross below the 34-day EMA on SPX and Nasdaq. Volume on today's decline was above its 34-day EMA.

RSI settled near 42 for both composites, suggesting further potential downside before an oversold state is reached.  At that point, as we know, markets can remain oversold for some time and continue to fall.

We are in "capital preservation" mode.

Sunday, August 15, 2010

A sea of red signals

Our internal breadth, sentiment, intermarket and momentum indicators flashed a sea of red this week. This is based on our simple tally of RED, GREEN and BLACK (NEUTRAL) readings as highlighted in our Market Tour on StockCharts.com. 

The list of negatives is as follows:

  1. VIX breaks above downtrend resistance as RSI moves above 50
  2. Put/Call is neutral (showing a sligthly bullish bias at a reading of 1.0)
  3. NY McClellan Oscillator remains in a downtrend; having crossed below its EMA 20
  4. The Down Volume trend has reversed to the upside, surpassing Up Volume
  5. Technology (Nasdaq), and Financials relative strength weakens, while Staples take the lead vs. Discretionaries
  6. Recent weakeness in industrial metals and continued signs of deflation based on a lagging CRB
  7. A sharp US Dollar bounce (potentially signalling a trend change - the dollar has moved opposite equities).
  8. Continued strength in Treasuries (and a recent weakeness in corporate bonds vs. Treasuries).
  9. Recent weakeness in small cap vs. large cap stocks (a sign of risk-aversion)
 We will accept these signals and remain on the defensive.

Click here for the latest Market Tour on StockCharts.com.

Sunday, August 8, 2010

Market Internals Weaken

Despite the continued uptrend in equities since early July, market internals have weakened as the rally becomes more selective and cautious.

A negative divergence has surfaced in reviewing the advance/decline ratio of NYA and the Nasdaq, as the solid advance in equities has been met with a flattening of the advance/decline ratio. We saw this negative divergence develop while the market rallied from March through the end of April (so this negative divergence can be with us for a while). Also, NYMO (NYSE McClellan Oscillator) has deflected from overbought territory, and it has recently crossed below its EMA 20.

Financials relative strength has weakened against the broader SPX.  Rates have fallen while Treasuries surge, as an aire of risk-aversion returns to the market environment. It is interesting to note that recent CRB strength has deflected from resistance near 280 as RSI corrects from above 70. Small Caps have been consolidating relative to Large Caps, further reinforcing the aversion to risk (and possibly a flight to export-intensive large caps as the dollar weakens).

There is nothing compelling to convince us to take significant long positions as this rally ages. We will tighten stops on longs and take select profits. Edging into counter-trend (short) positions and protecting longs with index puts are favored, as our market perspective remains neutral (with a bias toward negative).

Click here for the updated market tour on StockCharts.com.

Monday, August 2, 2010

Weak rally continues.....proceed with caution

Trend following indicators continue to support the uptrend despite the weak volume on the upside. Resistance continues to be the key roadblock (SPX failed twice to beat the 1120 barrier as it closes near 1102).

Contrary signals starting to emerge include the dollar reaching a 50% retracement of its climb from December (and oversold). Considering that the dollar has moved opposite equities, a reversal could spell trouble for stocks. NYMO (NYSE McClellan Oscillator) corrected from an overbought status and is nearing a negative cross of its EMA 20 (a bearish sign).  Put/Call ratio is neutral-bearish, but VIX continues to weaken, a positive sign.

Bonds have been particularly strong as rates begin to weaken (recent weakness in the 3-month T-Bill rate is disconcerting).

Our blend of technical indicators suggest caution and a neutral stance.

Click here for the latest Market Tour on StockCharts.com.