Summer is fast approaching its end and volume continues to be light. Whether it is summertime trading or institutions simply not willing to accumulate shares may be a sign this rally might not have much leg room. Gains across the board were solid. Consumer discretionary names led the pack while consumer staples lagged. Technology stocks had a nice day of gains too. However, the lack of volume should raise a warning flag. Another warning flag was the 2-year treasury note briefly surpassing the 10-year treasury note once again. Recession fears due to trade wars are certainly running high. Our focus remains on the price action of our stocks while maintaining our proper risk management process. No matter what this market wants to do we will protect our capital.
SPY, QQQ, and IWM are all trying to come off last week’s nasty distribution day the day after this new rally was confirmed. This is not the first time we have seen this situation. Majority of confirmed markets fail when the day after confirmation there is a distribution day. It is not absolute. Fears over a recession are real and on top of that we are in a seasonally weak period for stocks. We already know IWM has been a lagging index. QQQ have been the leading index for quite some time as big institutions flock to large cap tech stocks. FB, AAPL, AMZN, NFLX, and GOOGL are the prime suspects. However, all 5 stocks look weak even with the past few days of gains. MSFT for its part remains in a nice uptrend. Given what we have in front of us the risk of a downside move is certainly higher now than earlier this year. It is important you understand your open risk and a game plan if the market goes south.
Last week the AAII survey was quite bearish and it remains so this week. Bulls were non-existent. We haven’t seen the AAII survey with such a bearish feel in quite some time. For the week Bulls jumped 3.5 points to 26.6%. Bears ended the week down 5.1% to 39.7% and Neutrals ended the week up 1.7% at 33.6%. The AAII survey is still leaning heavily towards the Bears this week and even though it is summertime and volume is waning we could see this market lift more. NAAIM Exposure Index comes out later today and given the past two weeks in the 50s we do not expect a large jump in this index either. The crowd at this moment is much too bearish and while sentiment is not a great indicator it certainly feels like we could still move higher.
We must remember this market wants to fool as many people as possible. Its job is not to help you make money, but to take your money. It is why we are so hyper focused on protecting our capital by deploying a sound money management process. Leaving ourselves exposed to unnecessary risk has the potential to ruin our ability to make gains in a good market environment. An absolute no-no when it comes to trading. We must be able to take advantage of upside. Otherwise, why are we trading? Stay focused and disciplined regardless of what the mood is of the market.
Remember, this market is in an unfriendly environment seasonally. Volume is waning, yet sentiment remains bearish. We combat this with sound risk management and not allowing ourselves to be sucked into the noise spewing from the financial media or any media for that matter. Enjoy Thursday’s market!
