Uptrend re-asserts itself

Most indicators have confirmed a bullish bias in the markets, while some indicators flash caution to take some protective measures on long positions.  SPX and Nasdaq work hard to push to new highs. Stocks above their 50-day moving averages have turned around as breadth positively follows the uptrend.  On a short-term basis (next few days?) some concern regarding VIX; its price has gapped below its EMA 50, to raise some concern of a modest pullback.

However, most indicators are decisively bullish.  Here is a list of the positives:

1. Small Caps outpace Large Caps while Growth beats Value. Outperformance by Small Caps and Growth underscores support for equities (small caps have led the way since the 2009 bottom, while growth was also favored during this timeframe, with the exception of Feb-Apr 2010)
2. The Corporate/Treasury Bond relative price has edged upward; a sign of narrower yield spreads and is favorable to equities.
3. Advance/Decline breadth tracks positively with higher equities.
4. A relative strength bounce in financials and continued relative outperformance in the Nasdaq
5. Discretionary stocks continue to outperform Staples
6. A surge in commodities and industrial metals, and a reversal (short-term?) in the US Dollar

Some downsides:

1. Weak to modest volume on the recent rally. This is our largest concern, as lack of volume support could suggest a continuation of the downtrend we saw in early November.
2. A divergence in Dow Theory; Transports have reached to new highs while the Industrials lag.
3. An increasingly complacent VIX and a relatively low Put/Call ratio. 

Sustainable success in trading and investing rests squarely on being on the "right" side of the market, adhering to the trend. When the trend appears to be weakening (we utilize many indicators to tell us when this is happening), potential actions would include taking select profits, setting trailing stops, selling calls, protecting positions with puts or futures, or even adding to positions but in smaller increments. Battling the trend with contrary positions (i.e. shorting a market at its highs), although it may have a winning day with a big move down, is typically a losing proposition. It is better to leave some money on the table and have your profitable longs stopped out, than to see your capital erode fighting against the trend.


Despite the downsides, price action is key and that suggests to stay the course on longs, but to watch carefully for signs of deterioration, divergence, and continued weakness in volume on the upswings. A strategy to sell covered calls may be prudent at this time.

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