Test Continues

Not much was accomplished this week. While the SP500 did touch another new high this week, the breakout attempt could not hold. At the same time the Russell 2000 traded to a lower low and briefly violated its 1,100 support level before recovering late Friday afternoon. It is unusual to see one index test new highs while another tests lower lows but that's what we saw this week. The divergence between the lower risk large-caps and higher risk small-caps continues and it can really be seen on the daily timeframe.

Russell 2000 (daily)

SP500 (daily)

You can see that while the SP500 continues to trade with higher highs and higher lows the Russell is in a very defined trend of lower lows and lower highs. What this means to us as Relative Strength investors is that we want to remain focused on the large-caps which are working and avoid the small-caps which are not. It really is as simple as that. Buy strength and sell weakness.

What was particularly interesting this week was how the Russell was on the verge of breaking below its major 1,100 support multiple times yet managed to rally back and trap the over eager bears looking to short the breakdown. We are truly in a holding pattern across the markets as the SP500 continues to trap bulls on these failed moves to new highs and the Russell 2000 continues to trap bears on the shakeout moves lower. However until we see a sustained move above or below these key resistance/support zones it will continue to be a range bound and difficult trading environment. This is why I emphasize focussing on individual stock strength and avoiding the mess that are the larger stock averages. There are many stocks that continue to act well despite all the chatter and that is where you should be focusing your funds. Large-cap names like CMI, CAT, AAPL, UNP, WFC, JNJ, etc continue to make higher highs and buck the overall confusing environment.

The key growth stocks we mentioned last week managed to hold on to major support and as expected are seeing some buy interest at current levels which should keep a floor under the market so long as it continues. Really though our focus will continue to be on the SP500, Russell 2000, and the large-cap winners. The stocks we should be watching are those making new highs as they continue to outperform the market. It is an interesting time for the markets as bonds continue to see fund flows and safety sectors are still leading the way.


 We really only have one notable chart from last week as our portfolio has continued to remain neutrally positioned. HAIN took a shot at a breakout early in the week but was then steadily sold the rest of the way and failed to retake broken support. Once again showing how difficult this market has been on shorter term traders; we are seeing a lot of false moves out there.

HAIN

We discussed last week how we would need to see the $94 level broken on a weekly basis before the downtrend was proven over. We did not see that this week although there was a good attempt. This looks like a classic false breakout and as long as prices stay below the swing high we will need to stay sidelined to avoid unnecessary risk.


The best advice I can give in an environment as tricky as this one is to lengthen your time frame so you are not caught in the many false moves we are seeing. The market is struggling to find it's direction and until it resumes in one direction or the other we need to remain patient and not make any large, aggressive moves. The time calls for capital preservation and only stocks showing strong relative performance should be considered for your holdings.