The day started off well with the NASDAQ gapping up more than 130 basis points. However, it wouldn’t last more than a few minutes with sellers taking over pushing the market lower. ISM manufacturing and construction spending didn’t help. ISM manufacturing was expected to be around 55, but the index came in at 50.9 a major slow down for manufacturing. Sellers continue to pounce on stocks, but we did find some relief towards the end of the day. Despite the late day rally there is plenty of damage being done to this market and we may be seeing just the very beginnings of a major market top.
While it is much MORE fun to be in a bull market where everything races higher. But, just given history we know all bull markets come to an end. Even during bull markets we can see sizeable corrections. The likelihood we enter into a bear market has certainly climbed given seasonal trends as well this bull market length. The average third year of a bull market yields just 3% and we are certainly seeing a bumpy third year so far.
What is more troubling is the lack of market leaders holding up during this time. Last summer we were able to see plenty of market leaders find support at key levels and even a few leaders setup in bases. One to note would be NFLX stock last summer as it built a double bottom base. This time around we lack the sheer numbers of market leaders setting up. Now, we are seeing former market leaders fail at key levels and beginning to show major structural cracks. These signs are giving us the big CAUTION message here.
Sell in May and go away has certainly held true so far for this market. The rally off of June lows did yield some nice gains, but the lack of volume really was a big TELL it would not be sustainable. In addition, as the market was consolidating these gains big time market leaders were not finding the necessary support you would normally see during market consolidations. Our initial thoughts were confirmed when the markets broke down last week in heavy volume. Now, we are barely hanging onto key support and it is only a matter of time this market succumbs to this selling pressure. Odds are, this market breaks loose to the downside erasing much of the gains from the September 1st, 2010 follow-through day.
Remember, we are NOT macro traders who do not cut their losses. What enables us to be successful is the ability to adapt and change our stance. We do not get married to a side and we can’t stand having the winds at our face. Stick with the trend.
Cut your losses short.
