Friday was a very ugly session for our overall stock market averages with every index selling off on heavier volume than the session before. The distribution days are starting to add up and the lack of volume on the upside leading up to this distribution makes it look that much worse. The NYSE, SPX, and DJIA also produced their 3rd Pocket Pivot Point sell signal in 4 sessions. It looks like the cluster of Hindenburg Omens have left their mark. At least there wasn’t one on Friday.
I know that a lot of individuals believe that lower oil prices is going to be good for Americans and while that is true for the 99% I do not believe this will be good for the 1% and that is who owns the stock market. Unfortunately for bulls, with Oil crashing, Bond Yields crashing, and now stocks starting to correct it is beginning to look like the market is seriously worried about deflation.
In case you do not know, the three worst things for a stock market are deflation (haven’t had it since the 1930s), a consecutive series of rising interest rates, and an extremely expensive stock market on a P/E basis. Right now, stocks are expensive and it is possible that the market is starting to forecast deflation. This is just a hypothesis at the moment but when I look at yields combined with commodity prices it is hard to see it another way.
My other big concern here is that bearishness didn’t move higher at all this week and bullishness didn’t come-in in either the AAII or II surveys. This now tells me the crowd is extremely complacent here and even though we had the VIX move 50% in 3 days with the SPX only down less than 2.5% the crowd is still overall bullish. In fact, just on Twitter today the amount of comments about us being now ready for a year end run were quite high.
I am still open minded and my current long positions would love a year end rally. However, before we get that, we are going to need to start to put a halt to this downside momentum. One of the more worrisome set of data points that I have for the bulls is that all four of my oscillators (MACD, TSV, Stochastics, and RSI) that I track on every major market index are still screaming lower with no indication that any of them want to turn higher. There is also not a single set of higher lows and higher highs reading in any of these oscillators on any index. This tells me that there is absolutely zero momentum on the long side for now.
We are now starting to get more New Lows than New Highs. These numbers were starting to dance with each other the past week, hence our Hindenburg Omens, but now the New Lows are taking over. Considering how close we are to new highs on the Russell 2000 and Nasdaq that is a bit scary. On the other hand, the NYSE has been in freefall lately and these two more important averages (RUT and COMPQ) in relation to new innovative companies have held up quite well. Stocks like FB and LNKD look like the market has just been chugging along in a sideways pattern.
So, for now, we have a lot of mixed signals and that is why we remain under a NEUTRAL condition across the board–outside of the NYSE which is under a clear operational SELL signal as it is trending below its 50 and 200 day moving averages. Once again, this weekend, we will be raising my stops on all of our holdings showing any sign of technical weakness within their overall pattern. This is not the type of tape where you allow your stocks any breathing room. We must continue to tighten up our positions. This will reduce the damage to our portfolio by the recent long signals that do not work immediately. Remember, three out of four stocks follow the general direction of the market.
Raising Sell Stops continues to be prudent in this market as we have four full sell signals this weekend. Three of the four triggered intraday Sell Stops on Friday at higher prices than where they closed. One stock closed slightly higher than where my final Sell Stop triggered and if it reverses higher I will put the trade back on. However, the money saved in the other three made up for the small slippage currently in the one outlier on the day. Four of the six partial sells below also hit intraday with two significantly lower than where their Sell Stops hit. The other two are slightly higher than where the Sell Stops hit.
This week there was only one session where we received a batch of new long signals. On Tuesday we received four new long signals. Two still look good (I should say, they are holding up), one failed, and one is barely holding on. Besides that one day, we had four sessions without a new long signal. This is yet another hint that the market is not healthy as we are clearly void of strong technical patterns. On top of this, I am lacking nice technical patterns, following this recent sell off.
This has been a problem the entire uptrend. The entire uptrend. There has not been one single “beautiful” chart setup that worked. A few stocks came close but all failed within a few days of attempting to form a “beautiful” technical pattern. In a strong tape, there is at least going to be one. When you have none, that is a huge red flag. With the current selection of individual stocks in my scans that look for these type of patterns we are currently drawing a blank. That is not good short term, for the bulls.
Everyone is still waiting for Santa Claus to come and save this market. Until my oscillators turn higher and begin to set a pattern of higher highs and higher lows I will not hold my breath. I would like for him to come to town, as I still have quite a few long positions but at 25% cash I feel I am ready to quickly raise that to a higher level if he does not. My biggest problem is that I am a man of science and demand evidence. There is not a lot of evidence for the existence of Santa Claus so count me as heretic but I’ll believe in him when I see him. Until then, I am ready to raise cash.
It’s going to be an interest week and I can’t wait to see what happens in this market going into the end of the year. I can’t personally remember when we had such exciting crazy events like Oil and Yields crashing in the month of December as we have now. It’s going to be at least entertaining. Have a great weekend. I’ll see you in the chat room on Monday. Aloha from a beautiful Maui where our north shores continue to pump out huge surf.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL – DATE OF SIGNAL
VIPS long – +450% – 7/17/13
OVAS long – 223% – 8/8/14
AGIO long – +137% – 9/24/14
VDSI long – +89% – 8/4/14
PAYC long – 38% – 10/30/14
CVTI long – 33% – 11/3/14
RENT long – +29% – 9/24/14
RUBI long – +29% – 10/29/14
