Thoughts, Trading

Thoughts on the Current Market Situation

Now what’s on many traders mind would be, is it the start of a decent market correction, or will this dip be bought as always?

For me, I see more troubling signs than positive signs. Those who are more conservative may want to just get out and stay in cash until the situation becomes clearer. Those who are less risk-averse may want to hold on to their positions, manage each position based on their individual price action, and consider entering some shorts to hedge. Those who are risk-loving may want to build a portfolio of various short positions.

Thoughts below:

  • Breadth
    • I track the % of stocks above 50 MA for NASDAQ, NYSE, and S&P 500. Generally the market is in for a spell of trouble when the figures cross down below 65%. That has already happened for NASDAQ (63.25%), NYSE (51.55%), and S&P is coming along soon (65.6%).
    • The cumulative (new highs – new lows) topped on May 20, 2013, and the S&P 500 topped 2 days later on May 22, 2013. Generally I find looking at the price action of the cumulative chart to be informative. In this case it has pretty much gone straight down.
  • Price action
    • The close of last Friday meant that there is now 2 consecutive weekly closes in the S&P 500 in the red. The last time this occurred was in September 2012. Basically if you look back across the uptrend since March 2009, each time this happens, the market corrects down to its 50 SMA or worse very shortly. The only times it did not happen was in 2009 when there were still disbelievers that the market has turned so the going was not as smooth on the up side. One saving grace is that usually there will be one up week after the two consecutive weekly down closes, before the market starts tumbling down. That would be the final time to unload your long positions.
    • There were 2 noticeable up push spikes over the last 2 weeks, on May 22, 2013 and May 28, 2013 at the open. Both were quickly and violently reversed. Even the “normal strength” up push on May 30, 2013 was sold down.
    • If you look at the price action of the E-mini S&P 500 futures, in recent days it has fluctuated between consolidation ranges and breakdowns. When the ES goes above a certain resistance level (right now  in the Globex session its around 1630) it gets shorted down. The resistance level has also be gradually pushed down.
    • Some of you might notice that even after a big down day, the ES generally recovers back to a level near the prior close, and might say that it is a sign of strength. Why doesn’t the ES drop down and stay down in the Globex session? I suspect that the ES traders are also worried that other large players might buy the dip, so no one is yet willing to do the big short. However, as traders see that stocks are getting distributed, eventually they will be bold enough to ignite the match so to speak.
    • Lastly, in terms of technicals, many would have noticed a diamond top formation in the S&P 500 which recently broke down. The SPX and NYSE have also broke down swing low supports. NASDAQ is still staying above the support level. For the bull case, you would want to see SPX hold conclusively above 1640, then 1660, 1675. If that happens, then there might be a good chance for another leg up.
  • Sectors
    • Currently the two hardest hit sectors appear to be utilities and housing-related stocks.
    • Consumer staples and telecom sectors are also not doing too well.
    • Typically one would expect that in a bull market, people would dump utilities, so the fact that the utilities are performing poor is indeed puzzling. This is the same for consumer staples and telecom sectors as well.
    • Housing-related stocks have been on a huge run since October 2011. It is not surprising for lots of folks to cash out of their profitable positions now in the overcrowded sector.
    • On this front, I would say the indication is mixed. We will have to watch further to see if the situation improves or more sectors get dragged down.
  • Macro
    • There have been various reports that the current economic recovery is unlike those in the past. While there is significant amount of QE, an article from Nouriel Roubini wrote that banks are holding on to a chunk of those liquidity and are not releasing it to the market.
    • In addition, there are also reports saying that the housing market recovery in many places are due to institutions buying property, rather than due to families buying as the job market improves and businesses growing.
    • The ISM manufacturing PMI number released yesterday was 49 for May 2013. The prior two times it was below 50 (i.e. contraction) was in Nov 2012 at 49.9, and July 2012 at 49.9 as well. While the Nov 2012 number should have been out in Dec 2012, we see that the market had a decent retracement from mid-Oct 2012 to mid-Nov 2012.
    • There are two bright spots. One is the declining unemployment figures since end-2009. If today’s ADP figures are not good however, that might add fuel to the fire.
    • The other bright spot is the University of Michigan Consumer Sentiment Index is still on an uptrend, with the last reported figure at 84.5 beating expectations handily.
  • Secular cycles
    • Those that have read Martin Pring’s book or other books on secular stock market cycles, would also know that we are already due for a decent sized decline.



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