The Big Wave Trading portfolio remains under an across the board SELL signal despite the DJ-30, NYSE, DJ-20 and SP500 still holding above their 50 day moving averages. The model has taken into account the price action of these big cap indexes, along with the current industry leader Utilities, and it simply is not enough to weigh the model off of the SELL signal due to poor action in the Nasdaq, Russell 2000, and the sentiment in the overall market.
Make no mistake about it, this is a broken market. Despite the Utilities, Oils, and other select big board big caps, the damage to the uptrends previous leaders has been too severe to simply ignore. If you define the strength of a market by the stocks that lead it higher, it is painfully obvious that something is wrong. Utility, Oil, and REITs are no the high growth innovative groups that lead a strong market uptrend. So the fact the market is rallying here off the backs of the slow and big stocks tells you that the market is not healthy.
Now, following Friday’s action there appears to be some cracks in the Oils and REITs. If this spreads over to the Utility stocks, there will officially be no fresh leading groups on a RS basis to take this market higher. It will officially leave every sector with technical damage. A market where every sector has noticeable technical damage only goes one way. Down.
On Friday, another round of selling hit the Nasdaq and Russell 2000. On top of that, previous leading stocks cracked hard. Take a look at V NTGR MA SSTK AWAY PCLN P AMZN FB UBNT SFUN FEYE TWTR CAMP TSLA SCTY, just to name a few. These are the definition of broken charts. You can see all of these stocks had large rapid price gains on an arithmetic scale and it is clear their bases are sloppier, choppier, and full of more distribution than they witnessed during any previous consolidation during the uptrend. If the market does not sell off here, you can be sure it will take weeks to month to fix these charts. With it being the sell in May and go away time of the year, these very well could form solid bases here.
Sadly, history doesn’t suggest that will happen based on the length of the current uptrend and the sentiment. More than likely, the ultimate outcome for this market, especially with the Fed tapering and going to have to raise interest rates at some point in time, this market is going to sell off during or after the summer. It is not guaranteed but based on the technical situation of the tape, the direction that interest rates have to go, the VIX, and current market sentiment measured by the Investors Intelligence survey this is the direction history suggest the market has to go.
Whatever happens during the summer you can be sure we will be ready to act accordingly to what the market gives us. Let’s say by some miracle bears take over the bulls on the II survey, the VIX jumps to 20+, and stocks do begin to breakout from consolidation patterns following a Follow-Through Day. If that happens, you can be sure we will jump on the bucking bronco and ride the trend higher. If the market cracks wide open, we are already positioned to take advantage of that thanks to our already working Put positions and leveraged ETF positions.
We will be around 25% short in leveraged positions going following Monday’s open. We would like to have larger positions based on the technical situation of the market but we feel the gap between the 50 and 200 day moving average makes it too risky here. The last SCREAMING SELL signal in our model came in the summer of 2011. If you look at that breakdown that started that sell off you can see that the 50 and 200 day moving averages converged on each other and that crack came with price right on it. You will notice earlier in the year the market tried to breakdown a few other times but the gap between the 50 and 200 was too large to really squeeze price in one direction.
Don’t be surprised if it is a very choppy summer. Something internally tells me we are either going to crash soon or we are going to have to deal with a lot of chop before we get that crash/sell off. So if we don’t crack soon, it is probably going to be a long boring summer. Whatever happens we will be ready!
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
VIPS long – 298% – 7/17/13
HEES long – 222% – 9/4/12
AER long – 133% – 6/27/13
WDC long – 100% – 1/9/13
USCR long – 79% – 4/12/13
TPL long – 54% – 10/22/13
JBT long – 25% – 9/11/13
