Friday’s session was definitely lackluster with not much excitement. That being said, the gains on the session were pretty solid and a very bullish close bodes well for more potential short-term price appreciation. However, before bulls get too excited, remember that the downtrending 50 and 200 day moving averages, along with those August resistance levels, await any price appreciation in the short-term.
For the week, stock indexes held up very well with the Nasdaq leading the way and only the NYSE not ending the week higher by closing down 0.09%. The bounce the past week occurred on below average volume and the lack of leading stocks setting up and breaking out of sound patterns during the week was not a great sign that this rally attempt will continue to have legs.
The biggest problem with the current rally attempt is that as soon as it produced a Follow-Through Day it was immediately met with a distribution day. FTD’s that are immediately followed by a distribution day have a failure rate of right around 100%. Expecting this market rally to continue without any problems with the upcoming resistance levels is definitely a low odds probability.
The best data point that I saw this week, for the bulls, was definitely out of the Investors Intelligence survey. Bears (27.9%) have finally outnumbers bulls (25.7%) in this survey for the first time since 2011. It is a bit surprising to me that it went from bullish to bearish so quickly but it has been four years since this survey has inverted so it is nice to see some normalcy return sentiment wise.
The biggest standout in the II data however is the amount of respondents that are bearish + expecting a correction. That number is also at 2008 levels which happened extremely fast and even more stunning is that all respondents expecting a correction overall is at 30 year highs. This is also occurring with the amount of bulls in the survey (25.7%) hitting 5-year lows. Bears are still nowhere near their 5-year highs of 46.3%.
Now all of this being said, I would not be so quick to be sure we have a bottom. First off, we do not have the technical setups necessary to sustain a major advance from these levels. Second, you normally need a retest of the lows. The lows on 8/24 had a capitulation like feel to it but the close left a lot to the imagination. Let’s also not forget that the last time the bulls/bears crossed on the II survey for the first time in 2008 the indexes still fell another 25% before finding a bottom.
The good news is that we saw fear in the VIX on 8/24 and now the sentiment surveys are lined up. However, we will need to see better technical price patterns develop in the leading stocks that have held up the best during this downtrend before I get confident that any major market advance can sustain itself. The good news, for the bulls, is that we are starting to get new long signals that are producing gains. We had two new long signals in medical stocks this week that have already produced gains of 5% and 17% each. It’s definitely a start but, for now, that is all it is. Remember, its still September.
Alright everyone. The market has sentiment lining up in its favor. Now we just need to see the technical patterns in individual stocks and the price/volume characteristics of the market improve. If we get that, we could have a nice October. If we do not continue to improve and instead find resistance at those downtrending 50 and 200 day moving averages and August lows there could be another flush to new lows before we find a solid floor to rally off of.
Keep your eyes open and ready for anything and everything to happen in this market. It is the only way to operate as a trend follower. Have a great weekend and we wish you the best during the upcoming trading week. Aloha from Maui.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
ANAC long – 310% – 1/20/15
SKX long – 124% – 1/26/15
PAYC long – 120% – 10/30/14
TVIX long – 86% – 8/20/15
DXCM long – 78% – 12/3/14
TREE long – 71% – 6/2/15
ADPT long – 58% – 5/18/15
FIX long – 49% – 3/11/15
ABMD long – 40% – 7/10/15
SERV long – 39% – 11/7/14
AVOL long – 39% – 4/21/15
AMSG long – 38% – 2/26/15
COKE long – 30% – 6/16/15
