Weekend Update: Profit Taking Gathers Momentum

Our post last week highlighted some warning signals for the market...This week those concerns were in part put into motion. We saw heavy profit taking across the board and many setups are in jeopardy. It is typical in bull markets to see a slow grind higher followed by swift and violent counter trend moves. These moves usually stem from some sort of negative news event and itchy trades fall over one another heading for the exits. This sort of action results in a "whoosh" (a highly technical term) type sell-off, but then ends relatively quickly and the rally continues. We have seen this often over the past couple years.

Its hard to see on this chart but if you zoom in and look at these bars you will notice how most of the large sell-off days we have seen for the last couple years, end or are no more than 2 days from a bottom, before the market V-shape bounces to new highs. Will this happen again this time? Is everyone expecting it to? We will have to see, but also you can see that these kind of moves are fairly typical in bull market rallies to new highs. The buyers continue to come in on any weakness and the trend resumes. The question once again is, will the market snap back another time?

This would be a MAJOR change of character for the market should we see multi-day/week failure without a sharp recovery rally. It will give us a very clear picture of how dip buyers are currently feeling. If the buyers dry up for the sake of taking profits, that would not be a good sign for stocks near term and a visit to the long term uptrend support would be the likely result.

That being said, here is the weekly chart to put things into longer term perspective.

When you take a step back, things aren't that scary at all. If the market continues lower and breaks the 20 WMA, it will be important to see that it bounces back very quickly. Looking back at the last couple years, price has not stayed below the 20 WMA for long, and never set a lower low after the initial bounce back. Shorter term things are not perfect, but longer term no real damage has been done to the SP500.

We did lose 3 of our 8 sector holdings this week with XLY, XLE, and XLP failing to hold their key support levels; I will be a seller of those at Monday's open. However I will also be closing my other sector holdings completely. I have continued to do more year-end review for the blog and have decided to change a few things this coming year and beyond. I will discuss those changes in a post to follow soon...hopefully by Monday at the latest. There are no major changes coming in terms of what we do, but I have reviewed our trades from this year and Portfolio performance, and I feel we could do even better in the future should we adjust the ways we manage open positions. These adjustments will be meant to continue to reduce risk, while improving overall returns simultaneously. That is my hope at least. Look for the post to follow...

--One last thing to note heading into next week is that TLT (20+ year Treasury Bond) has signaled a "Buy" for a partial position entry (this is part of what I will discuss to follow). What is notable is that this is the first time since the large decline that we have gotten a signal to buy Bonds. That substantial decline also corresponded to the major rally for the SP500. I feel this is something not to be taken lightly; Bonds move inversely to Stocks, so the fact that Bonds say "buy" means the opposite is on the horizon for Stocks potentially. This is something to monitor front and center, and even an entry position in TLT is prudent at this time.

I have entered a 2/3 position size (again this will be explained very soon) for all accounts as a protective hedge. When the market suggests weakness, I like to protect my open positions with Bonds rather than shorting the market. Bonds react slower than a direct Short position against Stocks should I be wrong and they also currently pay nearly a 3.50% annual yield. You get protection from market declines, a 3.5% yield, and potential price appreciation. Whereas if you short Stocks, you had better be right because you will lose a bit of money if you are wrong. Bonds provide some protection (though its not 1-1 like shorting is) and allow you to make something on your cash holdings in your accounts while Stocks go through corrective periods.



--also to keep on your radar is that the Fed will have its January meeting this coming Wednesday. Participants widely expect them to continue to reduce their stimulus efforts by another $10B per month. Market participants expect this to be the case, and you know what the market likes to do to everyone's expectations...it likes to surprise the hell out of them. So be ready for a possible surprise to what the herd expects.

---Good luck out there this week. My follow-up post will be up soon explaining our strategy adjustments for the future.