The Other 75%

Random Thoughts

I wish I had something new and exciting to report but I don’t. Yet again, the Ps (S&P 500) still seem to be masking what’s going on beneath the surface. They pushed higher, gaining a little over 1/3%. This action puts them just a little more than 1% from all-time highs. And you know me, as a trend follower, I don’t argue with a market that is at or near new highs. If a market is to trend, it has to make new highs. That’s an inescapable truth. In fact, that in and of itself pretty much sums up technical analysis. If A > B and C > B, then the market will have to pass through B on its way to C. Buy at B and sell at C (or D or E…). Easy huh? Well, not quite but you get the idea.

My point is that the Ps look okay but you can’t just take things on face value. You have to dig a little deeper. Before we do that, let’s look at the other indices.

The Quack (Nasdaq) gained over ½%. So far though, it only appears to be pulling back from its recent slide.

The Rusty (IWM) gained just less than ½%. It too only appears to be pulling back from its recent slide.

The Quack and the Rusty are once again more indicative of what’s actually happening within.

Most issues remain in downtrends or questionable at best. And most, at best, have only pulled back.

Most of tech remains in a serious downtrend. This isn’t a shocker when you consider that the tech filled Quack remains in an intermediate-term downtrend.

Draw your arrows on Biotech, Drugs, Internet, and Software. So far, these areas only appear to have pulled back. They look poised to resume their downtrends.

The Financials remain in a serious slide too. So far, they also only appear to be pulling back. Subsectors here such as the Brokerages look poised to make a new leg lower from a Bowtie down. Not every Bowtie will turn into a major top but every major top will have a Bowtie or other transitional pattern (email me if you need the pattern or check education later this week for an upload).

Health Services, which was just recently at all-time highs, looks poised to make a new leg lower out of a Bowtie.

Speaking of Bowties, only 61 of the 239 sectors that I follow have the Bowtie moving averages in uptrend proper order (10 day simple moving average > 20 day exponential moving average > 30 day exponential moving average). And, most of those are commodity, defensive, and REIT related—areas that can trade contra to the overall market.

So based on this one measurement alone, 75% of all sectors are not in uptrends.

Conglomerates, Banks, Manufacturing, Retail, Consumer Non-Durables, Leisure, and others remain below multiple peaks.

Yet again, about the only thing that remains in bona fide uptrends are the defensive issues such as Food, Tobacco, Energies, and Utilities.

The REITS have been doing well too. Again, I’m not sure you can build a bull market on those areas alone.

So what do we do? Right now the market should be viewed as a market of stocks and not a stock market. Your head is in the sand if you think all is good in the world just based on the Ps.  Yes, score it as a positive, but don’t forget what 75% of all stocks are doing right now. Considering this, the game plan remains the same: On the long side focus on those aforementioned mostly defensive issues that have been trending higher. On the short side, those areas that have recently rolled over such as the Financials could provide opportunities. Also, tech in general, but especially Biotech and Software looks poised to resume their downtrends. I’d prefer to avoid the short side altogether but (again) as short to intermediate-term (and hopefully much longer!) traders, we have to play the hand that’s dealt. As usual, wait for entries. As I preach, that in and of itself might keep you out of new trouble. And, of course, stops will help to mitigate damage once triggered/on existing positions. Based on the questionable market conditions, continue to be really really selective. Unless you think you have the mother-of-all setups, then pass. It’s okay to sit on the sidelines and let everyone else fight it out.

Best of luck with your trading today!

Dave