The Heat Is On

Random Thoughts

“…..the market appears to be coming unglued. What’s strange is that I’ve never seen it happen this slowly. This too is concerning. ….. is the frog being boiled slowly?”

Two of my favorite market adages (which I first heard from Linda Raschke) are “The market will often do what it has to do to cause the most pain to the most people” and its corollary “The market will do the most obvious thing but in the most un-obvious manner.”

These adages are the basis of my boiling the frog analogy that I’ve been talking about for quite some time. In Monday’s column—yet another boiling frog based theme-I reiterated the fact of how things were looking very questionable. This was based on the face that Defensive issues are all that’s propping up the market, numerous debacle dejours—even within the defensive issues, the action in the Rusty (IWM), and the fact that majority of the tradable stocks remain in downtrends.

So, what did the market do in spite of this obvious trouble and my eloquent prose pointing that out? Well, the Ps (S&P 500) broke out and rallied to all-time highs. This caused a lot of celebration in the media (I’m told, I keep my TV off in my office unless I’m using it to display big ass charts).

As I preach, follow through is key. In spite of all the excitement, the Ps came right back in. The heat got turned up on Thursday and they began to slide. They ended just under 1% lower so it is not the end of the world. What is concerning is that they did this right after the “come on in, the water’s fine!” in the vein of the aforementioned most pain/obvious-un-obvious adages.

The Quack (Nasdaq) ended off its worst levels but still lost just over ¾% nonetheless. It remains in a downtrend but has been very choppy and sideways as of late.

The Rusty (IWM) continues to tell the tale of two markets that I have been talking about ad nauseam. It sold off hard but did recover to end off its worst levels. For the day, it lost .68%. This action has it closing just shy of new highs for the year and it keeps it in a solid downtrend. Draw your arrows. The Rusty represents what’s really going on within this market.

One of my biggest concerns lately has been what’s going to happen, when, not if, the narrow leadership—of mostly defensive issues–begins to correct. I think we got a taste of that on Thursday.

So what do we do? They’re not going to make it easy on us. On the long side, Defensive issues appear to remain in uptrends and have only corrected. I just hate playing the only game in town. It’s much easier to play when everything is going up. Like Pinocchio being a bad motivational speaker, everyone knows that.  Also, one has to wonder is will the correction be just that. And, if they correct further, the market will likely slide and we could end up with a chicken/egg scenario. The short side seems pretty obvious at this juncture. Unfortunately, with the market being extremely choppy, it’s been really had to get on and stay on. As I have been preaching, this is not an easy market (see yesterday’s webinar for more on this). Remember, sometimes your best action is no action.

Futures are firm pre-market.

Best of luck with your trading today!

Dave