Weekend Update: Mixed Messages

It's been choppy, sloppy and mixed trading for much of 2014 and it doesn't exactly look like that will end any time soon. My radar is reaching level 2 status, but I'm not quite ready to go full bearish just yet. I still think we have another surge in us before we see an intermediate term top in stocks. We are however likely getting very close to a corrective period as many warning signs are surfacing at the moment. This week we are going to take a look at the good and the bad in the market. Depending on how these trends continue over the next month will likely tell us everything we need to know.

(All charts shown are Weekly bars)

(Mixed) The good news is the SP500 is holding its short-term range and we see the 20 WMA @1,825 still below current prices. The SP500 is the strongest, relative, US index currently. What is troubling about that is when large cap stocks begin to lead in a rally, it's usually near the end? Could be trouble...

(Negative) The Russell 2000 small-caps and the Nasdaq both failed their intermediate RS uptrends vs SP500 this week. Both are testing their 20 WMA and seeing distribution signs. These indexes represent higher growth/higher risk companies that tend to show Relative leadership during strong markets.

(Negative) Bonds are breaking out, while skimpy, a breakout's a break out. This is a big level for stocks. A major swing isn't confirmed yet but it's toeing the line. We have been waiting for this Double Bottom to trigger for some time now and this week's close is the highest weekly close in nearly a year.

(Mixed) Our portfolio continues to show increasing allocations toward cash and bonds now, as well as Utilities and Health Care ...which are key defensive groups. Fortunately we are still seeing WFC, PBW, PPG, CMI showing strength and holding up. With this week's add to our TLT position on the breakout signal, we now are holding: 32% Cash, 10% Bonds, and 58% Stocks. So we are still leaning with stocks at this moment, but again our primary holdings are more Defensive in nature and we are not holding our high momentum name DDD as well as our Consumer name F. Those represent the highest upside picks in terms of a strong market and economy. To see those failing while Utilities and Bonds are leading is not a great signal for the market as a whole.


(Positive) Big banks are still performing though. The XLF is in breakout mode. WFC, BRKB, USB, AXP, JPM are at or near their all-time highs. When XLF is a leader the market is usually strong.

(Negative) The Consumer space is undergoing a large shift for the negative:

Consumer Discretionary stocks are weak. To put this chart in perspective, this is THE uptrend vs the SP500 since the 2009 lows. Coming into the year Discretionary was a key sector to watch as it has lead for the ENTIRE uptrend. A breakdown here looks bad.

While we see the more "risk on" Discretionary stocks breaking down from a long-term Relative trend line, we are seeing the Consumer Staple stocks beginning to breakout here after being tattooed for the better part of a year. Typically when Staples lead the market it is not a good sign. These are your true Defensive names: Coca Cola, Procter and Gamble, Phillip Morris, Colgate-Palmolive, etc. Strength in these names means investors are expecting turbulence ahead and are looking for shelter.

(Mixed) Metals are unsure. We've seen a strong rally recently but also a brutal smack down the last two weeks.

Gold has seen a strong rally since the beginning of the year, but the last two week's action has taken back roughly half of those gains. I said last year that I would begin to worry about stocks when Gold (and Bonds) began to build bottoming formations. We have seen this over the past 6 months in both groups. Investors are seeking safety, that should not be overlooked.

Palladium, while seeing some quick profit taking too, has managed to hold its new long-term breakout. Within the Metal's space, Palladium continues to be the leader and Relative to stocks, is looking fantastic as well.

(Positive) Sentiment is souring recently. It seems that most participants feel the market is headed lower from here, yet we are still above support. See the latest AAII Sentiment survey here. Stock Twits Sentiment for the SP500 came in at 40% Bulls and 60% Bears this week as well. We are seeing some new found hate recently which is typically a contrarian indicator.

For those counting along, that's 2 positives, 3 negatives and 3 neutral. When it comes right down to it though markets are still in uptrends and major support levels are still in place. There are some bright spots and some blemishes, we simply need to continue to adjust as the market adjusts. Think of managing your money as a steady, flowing stream. We flow from one area to another, seamlessly and smoothly as the flow carries us. Many invest more like a waterfall. They are all-in, all the time and things start to speed up until they lose all control and fly right off the edge. That is what I try to avoid doing at all cost. If you let the market tell you where and how to position, things will flow much more smoothly and successfully. Follow the strength and manage your risk first. Let's see how this all shakes out from here, either way we will be listening to the market for the best path forward.