US markets continued to rally this week and are once again at new all-time highs. While most major sectors traded in lock-step with the SP500, we did see some interesting rotation going on under the surface, most notably money flowing into Financials and out of Biotech and Utilities.
There was also the February Jobs Report that was released Friday morning showing better than expected employment figures than analysts had expected. It still seems like markets want to trade higher over the long term, yet it is likely that we will see some sort of meaningful correction before another big leg higher. We have briefly touched on the Elliot Wave Theory of market trends before and I think it would be a good time to revisit where we likely are in the current bull market.
In Wave Theory it is stated that markets trend in 5-wave cycles. These cycles can be observed on any time frame you choose to view the market, but for our purposes we will looking at the overall secular bull market starting from the '09 lows.
(Watch a quick Elliott Wave tutorial here)
From my perspective we are somewhere within the 3rd wave of the long term 5-wave sequence. 3rd Waves tend to be the longest of the 5-wave count and really fuel the sentiment that leads to a 4th Wave correction and then the 5th Wave blow-off surge. The problem with Elliot Wave theory is that there is ultimately no way to know exactly where you are in a cycle, you just have to discern as well as you can and look for clues that would suggest the approximate location. Here is my best shot at the current count:
SP500 rally from post-crisis lows roadmap
SP500 Wave 2 Correction
The Wave 2 correction targeted the 38.2% Fibonacci retracement before resuming as Wave 3. The 38% retracement is a primary level of support after a rally, although it is not uncommon to see a 50% and even 61% corrections also. In powerful trending markets 38% is a go-to level of support.
SP500 Wave 4 Simulation
You always want to be looking for patterns in the market. So if we use the Wave 2 correction as our initial guide we would expect to see the 38.2% Fibonacci retracement of the 3rd Wave. The most significant levels to watch are where prices supports cluster together; the more support levels coincide with a particular price, the more important the level. When looking at the "potential" Wave 4 correction I notice the 38% Fibo is at 1,570, I notice the prior all-time highs from '07 were at ~1,570, and the uptrend line from the post-crisis bull market rally also intersect near the 1,570 level. On top of that, markets love to retest prior breakout levels and it would seem reasonable to retest the '07 highs as a correction target.
If my analysis is close, we are still well within the 3rd Wave rally. There is no way to anticipate the end of this wave and it can continue much longer than is rational. We will simply have to follow as best we can as long as the market can hold its trend of higher highs and higher lows. Once that uptrend is broken we will most likely have to step aside and let the 4th Wave correction play out. Using a basic Fibonacci retracemeant measure, I would expect the 4th Wave to target the prior breakout and retest that level as support. It is from that level that I believe the 5th Wave would launch from. We will continue to monitor this in real time and make adjustments as they come. It will be assumed 1,570 will be MAJOR support on any sort of broad market weakness. For now let's continue to defer to the trend and follow our outperforming holdings.
--This week we only had one change to our holdings and that was getting the final exit signal on DDD. We also saw several new highs and some very strong moves. Lets take a look:
DDD (reduce 1/3 position, 0/3)
First things first, here is the look at DDD and why we got our final exit signal on our remaining 1/3 holding. While the initial breakdown last month looked nasty, the Relative uptrend managed to hold its trend support, the rollover this week could not hold that trend and has now failed. Price is below the 20 WMA, 1-year RS trend has failed. and the look of a bearish Head/Shoulder Top formation was triggered with this week's weak finish on Friday. It's time to watch this one from the sidelines and see if it can reverse this negative course.
PBW
PBW really moved this week, advancing $.54 or nearly 8%. Since the breakout Clean Energy has jumped over 15% in two weeks. That is exactly the kind of move we hoped to see with these strong base patterns triggering. We are watching two patterns here and the smaller pattern has acquired its measured target at $8. Now I would expect some mild consolidation before the next move to our upper target near $10.40. This is a group of strength going forward.
WFC
WFC, along with the rest of the Financials really saw a big pop this week. This would be very positive for the market if the dormant Financial group could rotate back into the market leadership role. This will be definitely worth watching closely now.
HAIN
Speaking of strong weeks, HAIN really caught a bid this week rallying 5.5%. So far this just continues to chug along the uptrend support and consistently forms higher highs and higher lows. We still want to be riding this one.
PPG
PPG had a solid week and continues to outperform vs the market. Just a strong uptrend here, nothing to over-think, simply continue to enjoy the ride.
UNH
UNH stalled a bit this week after a very strong 4 week rally which is expected. This one is just getting started and a little cool off short term could be good for the longer term rally.
CMI
I will say the same thing for CMI. It just will likely need some time to digest the recent bounce before continuing higher.
AEP
You can see how these markets rotate in the short term. Only two weeks ago CMI and AEP were our two strongest performers based on their recent price action. Yet the last two weeks has seen a little cooling and we have seen some of the weaker names heat right back up with HAIN and WFC. There is nothing to worry about here either as I think this continues higher after a pause.
TLT
Treasury Bonds came close to triggering an exit for us this week after once again being rejected hard from the $109-110 resistance. We will need to see a clean break and close below the 20 WMA and a failure of the RS trend support to stop us out. So far it seems that stocks have the advantage over bonds here as bonds continue to struggle to take out major resistance and stocks are at new highs.
Overall it was a strong week for the markets and for our Portfolio, I think short-term the market could need a rest but as long we it continues to trade above intermediate term trend support we have to continue to defer to the strong price action. Once the market begins its potential Wave 4 correction we will likely have to step aside and reassess our outlook and holdings until the long term trend can resume. Its never a bad time to prepare for what could be around the next corner. That doesn't mean we try to anticipate what might come, but it does mean that we have a plan in place for that inevitable shift in trend.
No comments:
Post a Comment