What’s Propping Up The Ps?

Random Thoughts

I like to do a lot of empirical research. That’s a fancy way of saying that I look at a lot of charts. I observe what’s going on vs. looking at some stats and/or taking things at face value. By doing this I can tell you that the vast majority of stocks are in downtrends. The exceptional standouts are Defensive issues and REITS. Other than that, again most stocks are in downtrends.

The Ps (S&P 500) had another decent up day. They are now just a stone’s throw away from all-time highs. Taking this at face value, you’d think that all is good in the world. However, since most stocks seem to be in downtrend, one has to wonder, what’s propping up the Ps?

I’ll tell you. For those who like stats: Only 36% of the 500 stocks are in an uptrend as defined by uptrend proper order of the Bowtie moving averages—10SMA>20EMA>30EMA.* And, most are defensive in nature. Consumer Non-Durables (8), Energies (29), Foods (14), Tobaccos (4), and Utilities (32). The other standouts are Metals & Mining(7)–some of which are Energy related and there are 15 REITS.

*See my new Youtube video on Bowties for more on uptrend proper order (scroll down).

With the Ps just shy of all-time highs, I’m guessing the media is getting ready to put on their S&P 1900 hats. I’m just not sure you can build a bull market on defensive issues, a few commodities, and some REITS.

My database has been producing a plethora of shorts and very few longs. Usually this is a sign to play the short side. It’s also a sign that the market could be in trouble in spite of what the indices might be saying. I don’t want to fear monger but I haven’t seen it this bad since October of 2007. Back then I remember apologizing to my clients for recommending shorts even though the S&P was right at new highs (you can download the archives if you would like to study them).

You know me. I’m a one-day-at-a time kind of guy. Yes, I’m concerned about the internals but I’m not going to make any drastic decisions. Yes, I will continue to look to add on the short side. And, yes, I will honor my stops on existing longs. If a great looking long comes along, then I’ll take it. As I preach, this ebb and flow will control the portfolio and help keep it on the right side of the market—or at least, in the right stocks in spite of the market.

So what do we do? Since the Defensive issues haven’t pulled back lately, you’re going to have to wait for setups there. On the short side, continue to focus on areas in downtrends or that have recently rolled over like much of technology—especially, Drugs, Biotech, and Software. Whatever you do, (warning speech ahead) make sure you really like the setup and, of course, wait for an entry. Once triggered, use protective & trailing stops and take partial profits as offered. See my videos under Education on my website for the basic money & position management.

Futures are soft pre-market.

Best of luck with your trading today!

Dave