Friday’s session was an official Follow-Through Day for the overall market. Major market averages reversed some pretty significant early morning losses, off the backs of a weak jobs report, rallying the rest of the day and into the close to finish at the HOD. This type of market behavior following a very bearish macro data point, and increasingly bearish sentiment, is definitely the best sign the bulls have seen yet that the market pullback may have run its course.
Now, this is a very early assumption, obviously. It is still way too early to conclude that we have seen the ultimate lows but I will admit that following today’s price action in the market and a lot of big-cap and leading stocks today was definitely a step in the right direction. Many big-cap and leading stocks have that “rounding out” appearance following today’s rally. This is the type of consolidation structure that helps launch nice uptrends, once stocks are able to clear their old previous resistance levels.
So while this is a great step. It is just a step. Now, in my almost 20 years of doing this for a living, I have noticed that the strongest upcoming uptrends occur when I receive long signals that follow through before a FTD, on the FTD, and immediately after a FTD. Unfortunately, I have not received any real quality signals before the FTD and following today’s FTD I did not receive any high quality long signals. Not only that but I didn’t flag any high quality names either. Not good for those that are in the camp that believe we are going to rocket straight back up to new highs.
What this indicates to me is that we probably have some more backing and filling to do if we are going to continue to rally higher from here. Remember, we still have two weeks left of seasonally/historically weak stock market action. It is always possible that we continue to just rally higher from here but we have a lot of short-term headwinds and seasonal headwinds that make this seem highly unlikely.
The best data points in favor of the bulls continues to be sentiment. We saw extreme volatility (fear) on 8/24 following the morning flash crash and this week for the first time since 2011 we saw bears and bulls invert by 10 points on the II survey with bears coming in at 35% and bulls coming in at 25%. This reading on the II survey does not guarantee a move immediately higher as we saw in 2008 where it had to get to a 20 point gap before we were able to rally. These readings are excellent starts, not to mention the AAII bulls have come in below average for a record 31 straight weeks.
Still, without high quality signals triggering, this is nothing more than a potential start to an uptrend and nothing else. There is still significant resistance ahead and today’s rally and overall start to this uptrend is no where near strong enough to have our models switch out of an operational SELL model. I will need further price progress on strong volume with leading stocks setting up and/or breaking out of proper consolidation patterns before I start to push my investments in the market.
While we may have indeed successfully tested the 8/24 lows and have the proper sentiment for a rally higher, cash still remains king as we come out of the August/September doldrums. We still have some hedges on and we still have some long positions but cash is still our biggest asset by far. And speaking of the short positions. Following today’s gains, many of these names we are holding are closing below their 20 day moving averages triggering 50% sell signals. While we have gains in all of these names, they are lame and nothing to be proud of (you should never be proud of any gains anyways).
As we head into the new week, I expect the market to continue to rally. If it continues to rally and I continue to not receive any high quality long signals my warning flags will start to fly. While it will not mean the market is going to fail, it very well might mean that we have to consolidate or back-and-fill this volatile price action we have seen the past two months a bit more. Keep an open mind here as we head into the new week. Sentiment continues to be too negative to be too bearish. However, a rally might turn this crowd just as bullish just as fast as they turned bearish, leading to a resumption of the downtrend.
The bottom line is that we are still range bound overall with little proper consolidation patterns out there to salivate over. When they show up, I will be ready. I will be going over a lot of the stocks that I see that are potentially bottoming this weekend in the video lesson. If you want to see some names that have that “bottoming look” I recommend watching this weekends video lesson. There are too many to list here but some of the names include NFLX, FIT, MU, JNPR, CBS, BIDU, WFM. It’s a start but it’s still just a start. Have a great weekend everyone. Aloha and I’ll see you in the chat room on Monday.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
ANAC long – 272% – 1/20/15
SKX long – 119% – 1/26/15
PAYC long – 112% – 10/30/14
COKE long – 56% – 6/16/15
TVIX long – 55% – 8/20/15
ABMD long – 32% – 7/10/15
SRTY long – 30% – 7/23/15
BIS long – 26% – 8/6/15
