Not much changed for us over here in Maui the past week, as stocks drifted higher into near new high ground for the NYSE and DJIA. The SP-500 managed to close at new all-time highs and the Nasdaq retook its 50 day moving average. Sadly, the one index you would like to see leading the way higher remains under its 50 day moving average; the Russell 2000.
The NYSE, DJIA, and SP-500 all remain under a BUY signal in our model. However, despite the retake of the 50 day moving average for the Nasdaq, our model remains under a SELL signal on that index–along with the Russell 2000. This is surprising at first glance but the reasons why include the heavy resistance that still lies ahead at the March and April highs.
This resistance came on some very heavy selling and we have seen absolutely zero accumulation in the Nasdaq with almost every up day coming on below average volume since the bounce started. That resistance combined with the low volume during the summer time is historically not bullish heading into the fall. We will see if it is different this time, in our QE/ZIRP reality.
Another issue is that there are not any new leadership in high growth industry groups and the leaders of this bounce remain the most heavily shorted stocks. This is not a sign of true leadership. Despite this, we will continue to take new long positions in the NYSE related stocks that produce signals. We had a few signals this past week and they all worked which shows us that despite the low volume on the rally the state of the NYSE related indexes are positive.
Despite the uptrend, we continue to be worried about the spread between bulls (complacent) and bears (non-existent) in the Investors Intelligence Survey and the total lack of fear in the market with the VIX hitting new 52-week lows on Friday. This information is not tradeable by itself but it must be kept in the back of our heads if the market decides to reverse this extremely low volume melt-up.
If the market cracks within the next few months on heavy volume, following this very low volume rally attempt, you can be sure we will swing hard and heavy on the short side. We will swing for the fences. That being said, we do not see a huge sell off happening as long as interest rates on the short-term stay low. If we don’t crash, chance are we will get another low volume melt-up. We will continue this until we probably see inverted yield-curves. That being said you don’t always need an inverted yield curve to have a major market sell off.
The other key fundamental data point that almost all sell offs have in common is high valuations on many different levels of measurements. We have that but at the same time that alone does not guarantee a market sell off. An expensive market on all valuation measurements and an inverted yield-curve. Now that is a totally different story.
Enjoy the rest of your Memorial Day weekend. Thank you and aloha from an overcast yet still gorgeous Maui.
TOP CURRENT HOLDINGS – PERCENT GAIN – DATE OF SIGNAL
THIS SECTION WILL BE UPDATED ON MONDAY
