Following a nasty little early morning selloff, stocks were able to find support soon afterwards and climb steadily higher throughout the session to finish slightly lower on the day. Not too bad, considering how we were trading early in the morning. Volume was higher on the session more than likely due to options expiration. All in all, not a bad week as we continue to consolidate the recent gains extremely well from what was extreme overbought conditions in the overall market.
The market is still overbought on my oscillators but they are rolling over and heading lower from the extreme overbought conditions that they were once under. While it is very possible that the market continues to hold up well there are some pretty complacent sentiment readings starting to show up in all of the “fear” gauges that I track. Investors Intelligence has bulls near 5-year highs (60%) currently at 56%, AAII bulls are at five-week highs (36%), the NAAIM exposure index is at 99% long, the CNN Fear&Greed index is at 77 which is considered in extreme bullish territory, the put/call is at .80, and the VIX is in the 11s.
Now just because traders are complacent here and the market’s are still overbought with momentum oscillators rolling over and heading lower does not mean a pullback is guaranteed. However, when we look at the current situation of the tape and how 70% of all stocks in the market are trading above their 200 day moving averages we have to conclude that the risk outweigh the rewards right here. That is why I recommend making sure your stops are exactly where you want them to be to lock in significant gains in current winners and prevent current winners from turning into losers if we do decide to reverse.
Right now, there is no sign of this happening and I remain heavily long many leading stocks that show zero signs of distribution. I would rather be prepared than complacent like the survey and fear gauges I saw all week long. It is great that we still had 10x more new highs to new lows on Friday but the margins are slipping from their rosy summer levels. It is also excellent to see some rotation out of defensive industries and into more “hot money” growth industries like Semiconductor/Chip stocks on Friday thanks to AMAT. Still, that being said, I see more problems on the short-term than I do potential opportunities.
What I would love to see is this pullback continue to come in nice and quiet and orderly helping to relieve the overbought conditions even more. Finding some support at the indexes uptrending 50 and 200 day moving averages would be perfect. Especially now that the DJ-Transportation Average has joined the rest of the market in trending above its 50 and 200 DMA with the 50 DMA trending above its 200 DMA. All that is left is for its 50 and 200 DMA to turn higher with price leading to put this market in the best possible technical condition possible for large potential price gains. If this happen, this rally could get really fun into the end of the year.
However, before that happens, this market has to get through Jackson Hole next week and the peak wall street vacation period during the next two weeks. While this might not seem like a big deal, it is. Not only do you have everything mentioned above to think about but we are now officially entering the seasonally/historically worst period of the year to be long stocks. The last two weeks of August until the last week of October are absolutely by far the worst period to be long stocks. As we head into this period you can be darn sure I am watching my long positions closely and will constantly keep a close eye on any holding that acts weak relative to the overall market.
If this market starts to weaken, I already have a handful of leveraged hedges in various industry groups and markets ready to hedge against any adverse price moves in my long positions and I will obviously tighten up my long requirements on any new long signal that triggers as we pullback. I’ll reduce size and increase my required technical/fundamental requirements on a continuous basis based on how the market decides to trade during this seasonally bearish period for the overall market.
After reading this, you at least can’t say I am not prepared. And if the market hits new highs? Great! I am extremely long. I hope that happens! However, I’d rather be awake to the possibility that we could have a sharp sell off here and not be surprised than be blindly bullish and shocked if a sharp pullback does commence. Alright everyone. Have a great rest of your weekend and I wish you all the best during the upcoming trading week. Trade well my friends. Aloha.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
EBIO long – +251% – 5/26/16
CLR long – +159% – 2/11/16
GRAM long – +108% – 4/1/16
SIMO long – +58% – 3/11/16
HBP long – +56% – 3/28/16
GGB long – +50% – 7/13/16
MIME long – +46% – 7/8/16
AOSL long – +42% – 6/14/16
EBIX long – +42% – 3/17/16
ALRM long – +36% – 3/1/16
OLLI long – +33% – 2/24/16
ABMD long – +30% – 3/29/16
QLYS long – +30% – 5/12/16
AVID long – +28% – 8/5/16
SSTK long – +28% – 7/6/16
NVRO long – +28% – 7/1/16
