The Market Behind The Mask (Continued)

Random Thoughts

You’re probably sick of me talking about how the Ps (S&P 500) continue to mask what’s really going on in the market. I’m certainly tired of writing about it—okay, it’s been mostly cutting and pasting but you get the idea. Unfortunately, nothing has changed.

Although they ended off their best levels, the Ps still managed to close higher. This action keeps them less than 1% away from all-time highs. Yet, in spite of this, most stocks remain in downtrends. Even within the Ps themselves there is an increasing number of stocks—now over 44%–that are in downtrends as measured by the “proper order” of the Bowtie moving averages–10SMA < 20EMA < 30EMA (see the Youtube video on Bowties and Thursday’s Chart Show recording). My point is that the Ps are not only masking what’s going on in the overall market, but they are also masking what’s going on within their own components.

For those who are wondering how this can be, remember that the S&P 500 is a weighted index. So, as long as those stocks with higher weightings stay afloat, so will the index.

In Wednesday’s column I discussed the fact that it has been mostly defensive issues that have been propping up the Ps as of late. What’s scary is what’s going to happen, when, not if, these issues correct. I would imagine that this will have a material impact on the index. The question then becomes, will this selling beget even more selling?

Other than Defensive issues, some Commodities, and a few REITs, the majority of stocks remain in downtrends.

Thursday’s action in the broad based Rusty (IWM) is more indicative of what’s really going on. It started strong but gave up initial gains to close down for the day. It looks poised to resume its downtrend out of a pullback.

The Quack (Nasdaq) also looks poised to resume its resume its recent slide out of a pullback.

Again, I’m just not sure you can build a bull market on defensive issues, a few commodities, and some REITS. And if you can, (again) what’s going to happen when they correct?

The good news is that you don’t have to predict every zig and zag when it comes to the markets. In fact, you can’t. DO pay attention to what’s going on. Right now is a very questionable environment. As implied above and recently, it’s a market of stocks more than a stock market, especially lately. So, listen to your database.

And, yet again, my database has been producing a plethora of shorts and very few longs. Usually this is a sign to play the short side. It’s also a sign that the market could be in trouble in spite of what the Ps might be saying.

Big picture predictions will get in trouble fast. 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. FWIW, we haven’t had a trigger in nearly 2 weeks. 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? Since the defensive issues haven’t corrected lately, 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. If you missed it, check out yesterday’s chart show. I covered all of the above in detail.

Futures are weak pre-market.

Best of luck with your trading today!

Dave