Pay Attention To The Net Net

Random Thoughts

Technical analysis in its most basic form is simply looking at where the price is and comparing that to where the price was. The change, “net net”, tells us if the market is higher, lower, or about the same. Now, before you say “duh” you’d be surprised at how many people who claim to be momentum players ask me about stocks that haven’t made any forward progress in weeks and sometimes even months.

Since my last column, the Ps (S&P 500) have pulled back below their prior breakout levels, circa 2075. This means that net net, they haven’t made any forward progress since late November.

The Quack (Nasdaq) has also pulled back below its prior breakout levels, circa 4800 here. Like the Ps, it hasn’t made any forward progress on a net net basis over the last 6-weeks.

Shorter-term, the news is slightly better in the Rusty (IWM). So far, its recent breakout remains intact. This means that is has held on to some of its forward progress on a net net basis. Ideally though, I’d like to see new highs sooner rather than later here, especially if you look all the way back to early 2014 to see that it hasn’t made any forward progress on a net net basis since then.

Many of the tech sectors such as the Semis, Computer Hardware, and Software have pulled back below their prior peaks, like the Quack itself.

Drugs and Biotech have lost steam on a net net basis. What’s interesting here is that the big cap issues are starting to look vulnerable here but many smaller cap issues appear to be alive and well.

Speaking of big cap stocks, a lot of the big cap areas, like the Ps themselves, have lost some momentum and have pulled back below their prior peaks. Insurance, Defense, Durables, and Non-durables are good examples here.

Utilities have pulled back and look poised to make a new leg higher. I’m just having a hard time getting excited about these stocks since they are lower in volatility. It’s harder for them to make a substantial move and something bad can always happen. It’s a little counter-intuitive but sometimes lower volatility stocks can be more risky than higher volatility stocks because more capital needs to be put into harm’s way in order to compensate for their lack of movement. See the Week In Charts archives from 2014—this was often a reoccurring theme.

I think it is important that the market makes new highs soon. This market seems to be filled with a lot of participants who are counting on higher prices. The “where else are you going to get growth?” argument isn’t always the best argument for higher stock prices.

The good news is that smaller cap/higher beta (volatility) stocks still appear to be doing well. I don’t know if this is the so called “January effect” but so far, speculation, at least in these issues, appears to be alive and well. My only concern is that should the overall market weaken further, those issues that have been defying gravity won’t be able to do that forever.

So what do we do? This first thing to always do when the market is looking iffy—or even not so iffy for that matter—is to honor your stops. I know you’re sick of hearing it but I’m going to continue to say it until each and every one of you begins to honor your stops, so here it comes: He who fights and runs away, lives to fight another day. Take partial profits as offered. Maybe the stock trend you’re in will continue for a long time. Or, maybe it won’t. Taking partial profits and trailing a stop higher allows you to have your cake and eat it too—make both short-term and longer-term profits. And finally, be selective. Make sure you really really like a setup. If you don’t then pass.

Best of luck with your trading today!

Dave