Stocks staged a solid session on Friday, following Thursday’s rounded out reversal off the lows. The bad news for the bulls is that the rebound came on much lower volume across the board with the DJIA leading the market higher. The best reversals come with convincingly higher volume with the Nasdaq and Russell 2000 leading the way higher. So while Friday was a solid session, and it does appear we are better setup for a bounce here, a bounce is all that should be expected for now.
Why do I say this? Leadership is still not correct with innovative high growth stocks leading the way higher. The two standout industry groups on Friday were Gold stocks (once again) and Food & Beverage stocks (once again). These are not the industry groups that lead new exciting long lasting uptrends. On top of this, volume was no where near climatic on Thursday’s reversal indicating rampant fear across the board. The VIX still has not taken out the August highs, using either the old or new way of measuring the VIX. So it is hard to say that we had any real fear on Thursday.
This being said there is at least some fear out there. The AAII survey came in below 20% for the second time in five weeks. Considering that this survey has only been below 20% six times in the last 20 years, this is a very interesting development on the psychological front. The last time it closed below 20% twice in five weeks was in 2009. That is 4x out of the 6x in 20 years. Even more compelling from a contrarian perspective is that the 8-week moving average of AAII bulls is lower than what it was in March 2003 and March 2009. This is obviously a very interesting development.
However, a survey is a survey. People can vote all they want with their mouth and keyboards but it is where they are voting with their money that interest me the most. On that end, the VIX does not indicate to me that we have any real fear in this market. In fact, for once, I am not being accosted by individuals that I know on a personal non-stock market related level about the falling stock market. Normally, during any kind of pullback, I get asked a ton of questions about the market by my personal non-trading friends. This time it isn’t happening.
Despite the non-interest in the falling market by my non-trading related friends, I must admit I did like the look of the rounded out reversal off the intraday lows on Thursday and made this very clear in the chat room. Following this reversal and seeing the follow-through that occurred on Friday only further confirmed my thesis that we could see a decent sized bounce here. Especially with AAII bulls basically hitting capitulation levels. This should be good enough for at least a bounce.
For this bounce to become something more than a bounce we are going to have to work off a ton of resistance at a lot of various levels on the major market indexes. I am not sure how these indexes are going to power through this heavy resistance without the back of a very accommodative Fed. Unless the Fed starts another round of QE or unexpectedly drops the interest rate level back, we are going to probably–based on historical patterns of the stock market going back almost 200 years–back and fill for weeks if not months. Without intervention there is no way this will be a quick fix.
This is why if you decide to play this bounce you must monitor your traders closely and be ready to bolt at the first sign of significant weakness. I recommend focusing on the leading stocks in the leading sectors that are in favor with the stock market elephants. Right now, it is mostly Utilities, Foods, Aerospace/Defense, Gold, and Bonds that are doing the heavy lifting. Focus on those. I do not recommend dip buying the “bargains” just yet. Wait for the market to confirm this rally attempt with a Follow-Through Day before trying this game in this tape. SUNE just gave another example on Friday to why this is necessary.
With all the nutty action out there, I was a bit surprised to see one of the only two stocks that remain in my Pre-Perfect Speculator scans (there are zero non-buyout/arb/merger names in the main scan currently) produce a serious actionable signal on Friday. [SUBSCRIBER ONLY CONTENT]
Alright everyone. It looks like it is bounce time. If it is not, we still have our small (unfortunately) short positions, leveraged inverse ETF positions and a huge cash position. This is still not a time to be a hero. We remain under nothing more than day one or day two (depending on what index you are looking at) of a rally attempt. We are not under a Follow-Through Day and our operational models remain under an across the board SELL signal in every major market average. The time to be a hero is when we have a FTD, our models are under an operational BUY signal, and leading stocks in leading industry groups are breaking out and following through. Until then, cash remains king.
Enjoy the rest of your long three day weekend everyone. I will see you in the chat room on Tuesday. Aloha from Maui. Surfs up!
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – DATE OF SIGNAL
UVXY long – +101% – 12/2/15
ANFI long – +30% – 11/19/15
AGRO long – +29% – 10/23/15
