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Did You See The Signs? If Not, Don’t Worry: Read This Column And Next Time You Will

By Dave Landry | Random Thoughts

Big Cap Stocks Now Breaking Down-Watch This Video Update And You’ll Know Why I’ve Been So Concerned

 

Dave Landry’s The Week In Charts (Scroll Down if you are looking for Random Thoughts)

Random Thoughts

Yesterday’s (01/07/16) action should have come with no surprise. The signs were there. It’s nice being able to keep your head while everyone’s losing there’s. Don’t get wrong, I get my ass handed to me more often that I care to admit. It’s just that we saw this coming. In case you’ve been hiding under a rock for the past 6 months, let me break it down….

Signs, Signs, Everywhere There’s Signs

The signs were there.

Breadth: I know there’s been tons of great work done using market breadth. My good friend Greg Morris just sent me his latest The Complete Guide To Market Breadth Indicators—and after a quick skim, I look forward to reading it (and you should too). However, I really like to get my hands dirty. I dig through 2,000-3,000 stocks each night, looking for my next soon-to-become treasure. In doing this, I get a pretty good feel for what’s really going on. If most stocks are headed lower—and they were—then I know that the major indices might be masking what’s really going on. Speaking of indices, you can’t take them at face value.

A “Cap” On The Markets? In capitalization weighted indices, sometimes just a few issues can keep them propped up. And, unfortunately, when the last of the Mohicans fall, it begins to get ugly fast. According to cap sort on the Ps, I’m showing Apple, Google, Microsoft, Amazon, and Facebook in the top ten. These can be seen as the 5 horsemen of the apocalypse. Apple fell a long time ago. The remaining 4 are in their early phases of breaking down and will likely set up as Bowties and/or First Thrusts soon. Some “old school” stocks in the top ten such as

GE and the Two Johnsons (J&J) are also beginning to break down from high levels. The bigger they are, the harder they fall. And when they do, they will take down the entire market with them. I spent a lot of time explaining this in yesterday’s chart show. Some say it was one of my best (thanks mom & dad!). Check it out:

Signal-The market began rolling over late last summer. This action formed a weekly Bowtie sell signal down (see free reports). Since these signals can lead to 50% haircuts or more, they should not be taken lightly. So what happened? Well, the market then promptly reversed after a just a modest sell off. This gave false hope to the buy and hope, I mean hold, crowd. They breathed a collective sigh of relief. Market’s will often do what they have to do to trick and cause the most pain to most people. It’ll also do the obvious in the most un-obvious manner (I stole those adages from Linda Raschke). The index action over the past 6 months is exhibit A.

Time-Don’t get me wrong, a market can do whatever it wants. It doesn’t care about you, me, or the guy who screams on TV. However, it’s just hard to run a race right after you have ran a race. The market mostly went up for over 5 years. In year six it ended down slightly. This forces those were beginning to drink the Koolaid of eternal sunshine to finally question their permanent income hypothesis. In markets many forget that sometimes return of capital is more important than return on capital.

Predict early, and often?
Well, I know how this business works. You predict early and often and when your dart finally hits, you look like a genius. All of a sudden, my inbox is now full with the “I told you so’s” from the newly printed bears. I didn’t predict often. I did see things begin to unravel early-last summer. This made me prudent, not a prognosticator. The action had me questioning new potential longs, considering a short or two, and mostly sitting on my hands. I took a lot of heat for saying to being prudent that’s okay. You have to stick to your guns but never forget to always believe in what you see and not in what you believe. And, I didn’t see anything to change my mind so I stayed the course—in spite of the skeptics, one of which suggested that I should consider another line of work. To that I say, touche’! (with the “t” sounding a lot more like a “d”, this will make more sense if you’re listening to the podcast).

I Told You So

I would never say “I told you so” (but I did sing it rather poorly in yesterday’s Market In A Minute-hey, I was half kidding!). Seriously, there’s a fine line between sticking to your guns and being obstinate. You’re going to be wrong sometimes but that’s okay. He who fights and runs away lives to fight another day (ancient hedge fund proverb). Being wrong and having to move on is frustrating. Being wrong and staying wrong is devastating (a paraphrase stolen from Morris).

To The Markets

It’s pretty ugly-how’s that for an oxymoron from a trend following moron? The indices are finally catching up to what I’ve been seeing internally. The Ps and Quack were down 2.37% and 3.03% respectively. This action has them closing in on double digit losses in just over a month.
The Rusty remains the poster child for what’s really happening. It dropped over 2 ½% on Thursday. This action has it down over 11% since November. Back the chart way out and you’ll see that it hasn’t made much forward progress since the summer of ’13.

In the sectors, well, I don’t even want to “go there grrrlfriend.” About all that glittered was Gold (and Silver). I guess it’s good that the baby wasn’t completely thrown out with the bathwater but a little flight to safety isn’t much to hang your hat on.

So What Do We Do?
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