Weekend Update: Is It Time to Get Concerned?

This week was the worst so far this year for the SP500. After making a new all-time high last week, markets retreated; the SP500 lost a little over 2%. While a pullback from the highs of less than 3% is really not much of a pullback, its the longest sustained pressure we have seen in 2013. What concerns me and many others are the signals the markets and the internals have been showing for the past couple months or so that continue to deteriorate. The SP500 also broke its key 6 month uptrend support this week, which is one of the primary signals I pay attention to in the markets. Its not possible to lose large sums of money in the markets until trend lines break. What I mean by that is as long as an uptrend is intact, higher prices continue to occur; the bottom never falls out until the uptrend fails. Once stocks break trend a couple outcomes are possible, the first an most hopeful is that the stock in question just bounces right back above the trend support and the up move continues. The second and most typical outcome is that the breakdown leads to a rollover in the uptrend and lower prices are ahead.

While I would like to hope that the market will recover and everything will be fine, that's not a way to invest and trade. Hope is not a strategy, so when a change of character occurs we must shift our focus and protect our accounts in the best way we see fit.

 


TLT confirms buy signal- Weekly Bar Chart

The TLT has broken out of a 6+ month downtrend and falling wedge pattern. The Relative Strength signal has confirmed the price breakout and the TLT has now outperformed the SP500 since early March. This move is being confirmed by multiple indicators I look at. Volume has been significantly picking up on the buy side since March, this shows accumulation of shares through large inflows of cash. Remember, we like to look at volume as it shows where money is moving in the markets, big volume moves like we have seen recently in TLT show strong interest in the underlying asset. The weekly MACD has also signaled a buy here and has followed through further from the initial signal. Treasury bonds tend to move opposite to the general market.

I have added a position in TLT in my accounts this past week.  I can use this as an opportunity to limit some risk in my accounts so I can remain positioned in the stocks that I still like (there are several right now).

I really hope that I lose money on this TLT position because that would mean the market moves higher from here, but I just am seeing too many things short-term to be concerned about. Another troubling development has come to pass over the past week. I'm referring to the relative breakout in the XLP vs SPY chart. Last week we were talking about a key level for the Consumer Staples vs the SP500 on its Relative Strength chart, this week that level was broken to the upside and is a bad sign.

The rally this year in Consumer Staples has been very very strong. In 2013, the XLP has finished higher 16 out of 18 weeks. Typically stocks don't move straight up forever, seeing that Staples have been such a winner year to date, it would seem reasonable to see some profit taking at some point soon by investors. A pullback by the Staples would usually signal a "risk on" type of trade and the general market would rally. However in this case, where the majority of money coming into and propping up the general is flowing into the Consumer Staple sector. Since Staples are leading this market higher, a sell off of the Staple stocks would in my opinion further fuel the downside momentum. We are in a tricky spot in terms of maintaining the broad stock market rally. Unless the money flows from the Staples into some of the lagging offensive sectors (healthy sector rotation), the market will likely be under pressure in the near future.

It will be very important to watch how other sectors that have lagged over the past few months perform when traders begin to sell the Staples. We will continue to watch this space closely.  

Russell 2000 Index

A reason I am still quite hopeful about the prospect of higher prices in the future for stocks comes from this index's performance and breakout to all-time highs.

As you can see from the weekly Russell 2000 chart is still well above its prior all-time highs and a pullback to the $860 level would still be considered very constructive behavior. When markets rally small caps typically lead the move higher and tend to start gaining momentum prior to the large caps and SP500. Likewise when the market is slowing and weakness is building, the Russell will often provide the "canary in the coal-mine" as it were, hinting to a broad market weakening. The Russell's strength against the SPY underwent a sharp decline the first week of April and has continued to under perform since. I would expect the Russell to find support near that prior level of resistance (860-870 area) which would be almost a 6% pullback from current levels and 10% from the highs. That would still fall into the "healthy pullback" category and should be bought. We will have to wait and watch to see how this plays out.

As for our watchlist stocks, there was little change in status. The most notable happenings were:

AAPL

 

AAPL broke to the downside under the 3 month trading range this week and continues to see lower lows. Also of note, anyone hoping the base was finally forming during this holding period, needs to acknowledge that we still have not seen a higher high yet. The bounce we saw and were tracking the outcome on last week, was still a lower high than the previous high set in the early part of trading range. One last tidbit here, I have noticed that the sentiment is still not nearly dire enough yet for a bottom. I receive daily email alerts from a popular blog site for my watch list stocks and seriously, 75% of those articles/blogs are covering AAPL....Still way too many people trying to pick a bottom in this thing.

PBW

The Clean Energy fund has managed to hold off the bearish looking top formation and has been trying to stabilize. The trading action still shows weakness due to the consistent lower highs/lower lows since the peak in mid February. Even this false breakdown rally failed to get above the right shoulder before rolling over again. This is not set up to be holding anything more than a base position at this time. No trading or adding to current holdings right here. Lets see how this plays out.

CMI

CMI broke down below its prior support level this week and looks vulnerable here. Stay clear of this space for now as well.

Its not all doom and gloom out there! There are lots of stocks that I feel are either set up really nice right here or in grave need of a pullback. Some prospects to check out this week are:

HD- needs to pullback significantly for another good entry
ABT- Same as HD, we need to see some nice entry points before loading up more
ROST- Ross Stores seems to be righting its long-term uptrend recently and is flagging nicely after a huge pop.
GOOG- After reporting a very strong quarter on Thursday shares surged $35 on Friday and the bounce occurred at very solid support. I think this one goes higher.
PPG- Also announced a great quarter on Thursday and has now broken above a 2 month downtrend resistance on strong buy volume. Big uptrend here!
ENB- After running to the upper range of the uptrend channel, a pullback is needed for better entry.
HAIN- Seems poised to pop on their earnings announcement due a week from this coming Monday. Its still in its holding pattern, but it looking set up to make a big move should results impress.
F- Ford is testing uptrend support and seems to be waiting for its earnings report due Tuesday before market open to determine its next direction. Do know that news tends to surprise in the direction of the current trend. Seeing that Ford's sales have been so strong recently and the fact that the trend has been steadily higher for almost a year now, favors an upside surprise to this quarter's numbers.
Big Banks (JPM, BAC, WFC, GS, etc)-are testing key support levels here and its do or die time for the financials. A breakdown here and the market continues lower. As go the banks, so go the markets.
UNH- Retesting a breakout of a one year trading range. Great buy above $58.

There are lots of interesting prospects out there right now which is why I am currently positioned 40% stocks, 20% TLT, and 40% cash. My stock positions are small and many as I am trying to ease into some good setups that I'm seeing. The 20% position in TLT is some protection I purchased in case the market in fact trades lower and my prospects get squashed. If the market goes lower I will still gain from my TLT position. I feel good with the 40% cash holding here as I can move in either direction should I need to. I can add to my prospects if they turn out to become winners, or I can add to my TLT position should the market deteriorate further. The TLT position allows me to take a shot at some decent values I am finding in the market and still covers some of the downside risk I am exposed to at this tricky moment.

Be cautious yet opportunistic out there. We need to be nimble in our positioning and mindset at this current time. We want to be able to capitalize on value, but most importantly we need to limit our downside risk.