While we must respect the aggression from the dip buyers, there are other areas of the market that are still showing ominous signs. As long as the key uptrend on the S&P can remain intact, things will be fine. If that trend gives way though, it will cause some definite concern. We will look at the sectors again today to see what the underlying "vibe" is for the market right now.
The key trend support here nearly coincides with the 50 DMA as well. I am a big fan of the 50 DMA, it is one of the most important indicators I use, and when its pointing up like this I'm a happy guy! So as long as the low at 1539 holds the uptrend can continue. After reducing a few positions this week and getting stopped out of a few others, I was down to my lowest holding in some time by Thursday afternoon (which was more lucky than good I think), holding only about 2-1 cash to stocks. When the market sold off on Friday, I was curious to see how the support would handle the move. When it stabilized I decided to take a shot at a few stocks that I had reduced earlier and added to a few positions. I am now back to a 50% invested position, with my eye on the exits if 1539 fails to hold. Or an eye on adding more if we can clear above some nasty overhead resistance that the market has been dealing with for the past month. Don't over think it, its still an uptrend...can't really get any more simple than that. Continue to buy into weakness like we saw on Friday. When the trend changes, we will change with it.
The Good News
XLF
Some good news from this week was the fact that the Financials were able to stabilize at critical trend support . Initially the trend and 50 DMA were broken early Friday morning, but were then able to catch a bid and rallied nicely into the close. With the major banks announcing earnings over the next 2 weeks i think we will see a continuation of this bounce into those announcements. Also shown here is the relative strength trend and that just tested support and bounced Friday. There was no breakdown in terms of relative strength and this also makes me feel that this is another "buy the dip" situation. Some ways to play this, I recommend JPM, WFC, BAC. Just an FYI, JPM and WFC announce earnings this Friday and BAC announces Wednesday 17th...Be careful buying new positions and holding through an earnings announcement, it is usually a good idea to reduce risk into an earnings report just because it is more of a gamble to buy a bunch right before the announcement.
XLY
Along with Financials, Consumer Discretionary has been a strong, offensive leader for this rally. This is another space where buying the dip seems best here. Good ways to play this space are HD, TWX, and F.
US $
The Dollar took a bit of a hit this week and broke its 2+ month trendline. Usually a weak Dollar is a good sign for stocks. Now we will just have to see if it continues to weaken or bounces back
The Bad News
TLT
This one is good and bad, depending on your time frame, so i think its important to look at both. Remember the TLT typically moves opposite to the stock market.
The Good- There is a long term bearish pattern beginning to take shape in the TLT. I'm seeing what looks like a potential Head and Shoulder Top pattern. This would be a great sign for stocks for a year or two to come if this in fact forms and fulfills.
The Bad- Short term and the only confirmed price action we have seen is the breakout from the downtrend channel and the huge gap up TLT saw in response to Friday's Jobs Report. This action only reinforces investors general distrust for the rally at this late stage. Relative Strength is also confirming the short term breakout. If the scenario I have created here plays out in any reasonable manner, it would seem that this will trade up to about the $126 level and create a short term bearish outlook for stocks. But the move should top out relatively soon and then would setup the long term move lower as the price action may suggest. A rally and break above the highs at $132 would kill the potential Head and Shoulder setup and likely be bad for stocks going forward. We will be watching this space closely as we move along.
XLV
Having a strong Health Care sector is not terrible, its just not exactly the group we want to see leading the rally. Health Care is usually a defensive group and when defensive groups lead it signals that the end of the rally is near. To be fair, this space has lead the entire time and is the year to date best performer of all the sector groups. Not a huge negative, but not the best either.
XLI
Industrials have broken below the 20 and 50 DMA's as well as the uptrend support trend. Prices closed well off the lows Friday afternoon, but this is not a positive sign for risk investments. Relative strength has foreshadowed this rollover for some time as it went below its trend support right at the beginning of March. If you followed the relative strength trend breakdown, you would have gotten out at a very nice price, near the highs.
XLB
Materials have shown similar weak action. Prices are flopping around just under trend support and clearly this is a group that has underperformed the market in general for some time. Relative strength has been in a steady downtrend for 2+ months.
XLE
Energy broke down hard to start the week. It also managed to close strongly Friday afternoon, but the general price action has been relatively poor for a month now. Again following the relative strength trend breakdown would have provided a great signal to move away from this space in mid March.
The Ugly News
Russell 2000
Now for the real ugly stuff! This is a chart of the Russell 2000 small cap index. When this index is outperforming the market it shows a strong interest in risk taking by investors. Small cap stocks by their nature are more risky and generally outperform during strong market moves and underperform badly during downturns. They also tend to be a "canary in the coal mine" so to speak in terms of trend reversal. The real key here will be whether it can hold above its prior low around 900.
XLP
The Consumer Staples continue to kill it and have just broken above a 7 month relative strength range resistance level. This breakout will be one to watch because when staples really start to outperform the market, the likelihood for a broad market pullback goes up considerably.
XLU
Utilities are similar in market sentiment to staples with their relationship to risk assets. When Utilities are rallying and leading, its typically bad for stocks.
XLK
And lastly, yet another bad sign for risk assets is this formation by the Technology sector. Having under performed for this entire rally, tech has just broken down from its 6 month trend support and is building a large Head and Shoulder Top pattern. This is still a long ways from fulfilling, but the recent breakdown could be signaling more weakness to come. The major test will be the neckline support around $27. I'm still a believer that this space can turn around and surprise everyone and a breakout above $32 would be very bullish for stocks going forward. Don't ignore this space!
Clearly there are some mixed signals present in the underlying market internals. That's why I have been content to hold around 50% in cash and wait for some of these troubles to resolve themselves one way or another. For now, I recommend holding lots of cash but also look to opportunities in Financials, Discretionary, Health Care, and Staples. These are where the strength in the market is right now and as always I look to invest in strength and sell weakness.
Stocks to consider on this pullback:
JPM, WFC, BAC, HD, TWX, F, HAIN, DDD
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