Overdue correction needs time to resolve

A relatively sharp decline in global indices (the much-needed respite we have spoken about in this blog, triggered by events in the Middle East) needs some time to find its footing before our trend-following strategies are re-engaged to follow the uptrend.

Nasdaq took the brunt of the selling this week; this was clearly seen in the percentage of stock remaining over their 50-day moving average, which sharply dropped below their low seen during the correction in November.  In addition, Nasdaq relative strength, which has been weakening, saw a sharp drop on Friday. See the charts below:

VIX surged above its 50-day moving average.  A large gap in VIX below its 50-day moving average warned of a possible reversal (which transpired this week). Now, VIX rests well above its 50-day moving average; we will be watching this gauge as a possible clue to resumption of the uptrend:

A sharp decline in the LQD/IEF ratio, our spread of corporate bond prices vs. short-term Treasuries, is a concern worth noting. A flat or uptrending slope in this ratio has been favorable to equities. Although the trend remains up, this indicator warrants watching for a potential trend change.  See the chart below:

Although the uptrend in equities remains intact, we will be watching our indicators for stronger signs of a change in trend. Holding off on adding large long positions (partial entries may be warranted) and maintaining our stops.

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