Clouds On The Horizon: Cut And Run Or Stay The Course?

Random Thoughts

I’ve been writing so much about how the Ps (S&P 500) are masking what’s going on internally that I’m getting carpel tunnel from all the <cntrl-A>, <cntrl-C>, and <cntrl-P>.  The Ps finally cracked, well sort of. They lost .81%. This isn’t the end of the world. This does keep the index sideways for the last 2 months. For the year, they are only up .81%. Still though, when you compare to other indices and the internals, they are hanging in there.

The Quack (Nasdaq) lost 1 ¾%. It appears to be resuming its slide out of a Witch Hat-like pullback (deep “V” retracement). Ditto for the Rusty (IWM).

My big concern has been how the Ps are masking what’s going on internally. It has forced me to dig a little deeper to see “what’s propping up the Ps?” Well, in recent columns I have shown that there are only a few areas that were keeping the Ps afloat, and most of these are defensive related—e.g. Energies, Utilities, or Commodity related (e.g. selected Metals & Mining, especially those related to Energy). These are areas that can trade contra to the overall market. They are not really what bull markets are made of.

Within the Ps, you have a tale of two markets. On the surface, things look okay-or at least now sideways, but internally, it’s just the opposite. I don’t want to dig myself into a statistical hole*, that’s not what I do. I just normally look at charts, lots of them. However, I couldn’t resist running some simple scans to quantify the number of stocks in downtrends within the Ps. 45% of stocks within the S&P 500 are now in downtrends based on downtrend proper order of the Bowtie moving averages 10SMA<20EMA.

When, not if, the last of the trending areas correct has been my big concern. And, we did see a little bit of that on Friday. Energy was off a little more than 1/2%. I still think we have quite a bit more of a normal correction left here, maybe another 3-4%. Furthermore, areas like Utilities actually ended higher on Friday. So, we haven’t seen a correction here at all. As I have been saying, when these areas correct in earnest, it will have a material impact on the S&P. I think we got a little taste of that on Friday. And, I think there’s more to come.

Okay Big Dave, you’re getting a little ominous on us again. Should we cut and run? Nope. Stay the course. As I wrote on Friday: 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. 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. If you missed it, check out last Thursday’s chart show. I covered all of the above in detail.

Futures are weak pre-market.

Best of luck with your trading today!

Dave

*Statistics are worthless, 75.3% of all people know that