Not A Caveman Market

Random Thoughts

The Ps (S&P 500) had a decent day. They gained nearly 1%. This action has them breaking out of their sideways range and closing at all-time highs. As a trend follower, normally I’d be very excited about such developments. I just can’t get onboard the “new leg” just yet. The last time I felt such little excitement for new highs was October of 2007.

Keep in mind that as a trend follower, I’m not going to argue with new highs for long. It just doesn’t feel like a new bull market. Momentum has left the “go go” stocks. Money has flowed into defensive stocks. And, the breadth has been narrow—mostly defensive issues. When you couple this with a broader based index like the Rusty (IWM) in a downtrend it is hard to get too excited.

Speaking of the Rusty, it gained a whopping 2.27% on Monday. Even with this massive rally, the index still remains in a downtrend. In fact, for me to get really excited about this market, I’d like to see new highs for the year in the Rusty and the Quack (Nasdaq).

Speaking of the Quack, it put in a decent day too, gaining just over 1 ¾%. It remains in a downtrend but has been extremely choppy as of late.

As usual, take things one day at a time. Monday was quite the day. Let’s see what Tuesday brings.

Transports banged out new highs with vigor.

Aerospace/Defense also made new highs decisively.

Still, there’s just not a whole lot to get excited about just yet. Yesterday notwithstanding, leadership remains weak. Most of the leaders remain in Defensive issues such as the Foods, Energies, and Utilities. Unless the market can string together a set of days like we saw on Monday, my concern remains what is going to happen when, not if, these issues correct. Also, again, I remained concerned that within stronger areas there have been quite a few debacle de jours—individual stocks beginning to break down.

Follow though will be key. I want the market to go up. I love drawing big up arrows and being called a “Trend Following Moron.” Unfortunately, I’m forced to face reality. Right now, things still aren’t as good as the Ps would suggest.

So what do we do? The action in the Ps is a positive development, make no bones about that. As usual, follow through will be key. Overall, things have been very choppy as of late. Usually, this is a sign to stay mostly out and let things unfold. On the long side, I’m watching the Defensive issues, especially the Energies, for setups. The debacle de jours here is concerning but most still appear to be trending. Waiting for entries can often keep you out of trouble on a lack of follow through. On the short side, continue to keep an eye on previous high flyers that have recently begun to roll over. Again, it could be a case of the bigger they are, the harder they fall. Wait for entries here too. If the market decides to go straight up, you won’t get triggered. For the most part, again, let things unfold. Trend following should be easy–so easy that even a caveman can do it. And right now, it is not.

Futures are firm pre-market.

Best of luck with your trading today,

Dave