Shakeouts and Bag-Holders

With the highly anticipated "Will They or Won't They?" Fed meeting now behind us, nothing has changed our bearish posture towards the market. The Fed announced this week that they will keep interest rates near all-time lows due to "uncertainty in global markets". This continues to piggy-back on the idea that Central Banks are trying anything to keep asset prices propped up. Whether they admit to it or not these policy makers are terrified about a downtrend in stocks. At the slightest inkling of weaker markets they fly to the rescue. While this has worked well for some time, we are starting to see the easing effects having less and less impact on price stability. This creates a tremendously unstable environment as speculation grows to whether the Fed remains in control of the market or not.

These things don't mean much to a trend trader. We simply acknowledge price and do our best to adjust our allocations to meet the current environment. From my perspective we still remain in a trap happy market that appears to be transitioning from a Bull phase to a Bear phase. This viewpoint was only proven more likely with this week's price action.

SP500 Daily chart

A lot has been made of the short-term price recovery and the importance of the 1990 resistance level. Both Bulls and Bears alike were watching this level like hawks to determine their positioning going forward. But in the market's usual fashion it provided a jolt to both sides leaving many scratching their heads. Prior to Thursday's Fed announcement the SP500 managed to close just above this resistance level. This acted as a signal to Short Sellers that caution was needed into the announcement. Remember the maxim "don't fight the Fed"? Its been ingrained in us over the past several years and it seemed to be playing out again.

Following Thursday's announcement of no policy change, markets rejoiced and rallied some 25 points. The remaining Shorts scrambled to not be schooled once again by the Fed, and left-out Bulls threw in the towel saying "I can't miss this move any longer". Well as the market likes to do it took both sides of the trade over its knee and gave them a good spanking.

What has now been created by this lovely trap situation are Bears who are now sidelined due to the upside breakout and Bulls who are now holding positions once again from higher prices. Friday's Options Expiration follow-through move didn't help this cause. Prices moved substantially back below the 1990 level and the market remains under increased overhead supply.


SP500 Weekly chart

Looking to the Weekly chart I still see NO reason to be getting excited about a strong rally in stocks. While there are select names that remain in uptrends, they continue to dwindle daily. The 20 WMA is now declining significantly and is about to cross below the 50 WMA. These are long-term averages folks, these aren't fast moving averages. They give a big picture look at the market trend and that trend is simply not looking bullish.

The firm rejection of the first resistance level this week is not a positive sign either. The fact that the market couldn't even test 2040 on a dovish Fed is notable and shouldn't be discounted. While we always keep an open mind to market movements, the weight of evidence continues to favor a changing environment where capital preservation is our #1 goal. 

While a dovish Fed and lower rates have been good to stocks in general over the past few years, one group that has not been able to take advantage have been Financials. Know that while every other major S&P Sector hit new all-time highs earlier in the year, Financials haven't even retraced 2/3 of their 2008-09 decline. This week I want to take a look at the Financial space in light of this recent Fed statement.


We had been quite bullish Financial stocks for the last year as the near term price action had been looking strong. However that posture changed as the market began its dive in mid August. In the wreckage of the August decline many were hopeful that even a modest rate increase from the Fed would have a positive impact on this group. As we saw however there was no rate increase and the Fins took it especially hard Thursday and Friday.

Financials (XLF)

After being stymied at overhead resistance, the XLF gapped lower Friday and closed at the lows. Both Thursday and Friday's declines came on heavier than average volume as sellers stepped in at resistance.

This is not a bullish development as Financials weigh heavily within the S&P index. The individual Financial stocks did not fare any better. Let's take a quick look at a few of the majors: 

WFC

GS

AIG

Our Lg-Cap Portfolio owned these three names until recently. We received exit signals on the breakdown Friday 8/21. All of these stocks are well below our exit points and appear to be resuming lower.

Notice though that while the trend is turning lower in these stocks, they all remain above their October lows. Unlike American Express below, which is below the October 2014 low and in fact rejected that price level at ~78 this week. 

AXP

Our only current holding in the Lg-Cap Portfolio (Short AXP) traded higher this week into our stop level. The price action following the Fed on Thursday rejected this resistance area and along with the other Financials, AXP broke lower Friday.


AXP Weekly

 The Weekly chart shows this rejected level even better. The stock also tested its declining 20 WMA and sold off directly. As long as it is below $78 on a weekly closing basis, I want to be positioned for downside here.

Relative Strength investing works exactly the same with shorting stock. Except instead of calling it Relative Strength, it should be called Relative Weakness. If we choose to short stock we want to do so in the weaker issues in general. That doesn't necessarily mean on a fundamental basis, they can still be fine companies. But rather the price action and trend need to be shifted lower.

We want to seek the weaker stocks in the weaker sectors. In this case Financials are looking like a very vulnerable sector and AXP seems to be one of the weakest trends in the group. We wouldn't for example be looking for shorts in the Consumer Discretionary sector as it remains the strongest group in the market.

Our Long watchlist is heavy Consumer stocks:

AMZN

FB

SBUX

GOOG

UNH

HD

LMT

There are still some potential Long setups forming out there. But nothing is compelling enough to take entry in our Lg-Cap Portfolio. I like the relative smoothness of the consolidations in UNH, HD, and LMT.

Thanks for reading.

-ZT