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.
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