Coming Unglued?

Random Thoughts

Well, it looks like we’re back to a tale of two markets. The Ps dipped but came right back. This action keeps them right in the middle of their trading range which is a percent and change from all-time highs.

Internally, things continue to deteriorate. Before we get to that, let’s look at the other indices.

The Quack (Nasdaq) continued its slide out of its recent pullback but found its low and rallied back to breakeven.

The Rusty (IWM) put in a similar performance but wasn’t able to get back to breakeven. For the day, it lost over 1/2%. This is more indicative of what’s really going on internally. My database is showing that more than 60% of stocks here are in downtrends as defined by the bowtie moving averages being in downtrend proper order: 10SMA<20EMA<30EMA

Most stocks are headed lower. I know this by flipping through charts. Lately, I’ve quantified this a bit just so I can justify to you what I’ve been seeing.

This is the most orderly unwinding of a market that I have ever seen. Things sell off, but not too much before bouncing back. And, in the meantime, the Ps continue to suggest that nothing’s wrong.

The problem is that market sell offs aren’t orderly. They are ugly. Orderly gives a sense of false comfort to the players. It reminds me of the frog in the frying pan (see my April 10th column).

I still remain concerned about what’s going to happen to the Ps when, not if, the defensive issues—Energies, Foods, and Utilities correct in earnest. I think that could be the trigger.

Okay Big Dave, you’re starting to scare me a bit. Well, you should be. It’s ugly out there. Am I the only one that’s seeing this thing slowly come unglued in front of my eyes?

Okay, so are you saying that the bull/bear switch has been flipped?

It sure looks that way. The problem is, as soon as you label yourself you tend to start seeing what you believe and not what you see.

Again, you really don’t have to outsmart the overall market. Lately the database has been producing shorts and virtually no meaningful longs. So, we’ve gone after a few shorts and have avoided new longs. Based on the zigs and zags, it’s been a bumpy ride so far.

It is a market of stocks and not a stock market. Warning, beating of the dead horse follows: And right now, taking on individual stocks on a setup-by-setup basis will help to keep you on the right side of the market and sometimes in the right stocks in spite of the market. Honoring your stops will help to mitigate your losses on existing positions and will take you out those who have ran their course. Waiting for entries on new positions can help to keep you out of new trouble. The money and position management—the portfolio ebb and flow—can be a beautiful thing. Longs stop out and shorts will trigger if the market rolls over. Longs will go back to work/trigger new positions and shorts will stop out if the market goes straight back up. And, if the market goes sideways, less and less new opportunities will present themselves and existing positions will likely stop out, eventually this will create a flat portfolio (no positions).

So what do we do? Not much has changed. Since the defensive issues haven’t corrected lately (or at least, not enough), continue to wait for a pullback before looking to position here. Continue to look to add on the short side. Essentially, continue to let the aforementioned ebb and flow control your portfolio. Come to the chart show on Thursday and I’ll walk you through this.

Futures are firm pre-market.

Best of luck with your trading today!

Dave