Well that sure was fun wasn’t it? This past week was quite an adventure for the overall stock market and trader’s emotions as stocks broke above key moving average lines on Wednesday’s following the Fed’s rate hike in another ill-suited V-shaped pattern. Then, to no one’s surprise at Big Wave Trading, stocks immediately reversed the move on Thursday and Friday selling off on strong volume. All the of the V-shaped moves the past two months just is just further confirmation to the overall Trend Followers nightmarish theme that 2015 has already been in US stocks on an EOD basis. Daytrading lower priced stocks has been the saving grace to a crazy 2015, fortunately.
With the breakout back above key moving averages on Wednesday our operational models by default switched to NEUTRAL on the SP 500, DJIA, and Nasdaq indexes. However, following Friday’s confirmation of Thursday’s sell off, our models are switching back to an operational SELL signal on all three of the major market averages. The Russell 2000 and Dow Jones Transportation Average remained under a SELL signal during the past week, despite the post-Fed moves. The DJT model has been under an operational SELL signal without a single switch since mid-May. At least one average has been in a steady trend all year in US markets.
This market continues to produce the feeling that we are experiencing a long drawn out major topping process. Trust me, I know I could easily be 100% wrong and trust me I will never marry my opinion. However, based on the way the market continues to look regarding breadth and the overall structure of price patterns in the indexes and leading stocks it does appear conditions are deteriorating rapidly. It is going to take a lot of work on massive volume to steady this ship.
One of the biggest hints that the market might be in some serious trouble here is that from our account highs at the start of December to December 18th we are in the middle of one of our largest drawdowns since 2012. This kind of drawdown did not occur when we were fully invested before the August sell off. However, now with the market closer to its recent highs we are experiencing a larger drawdown. This is severe Relative Strength weakness in our portfolio compared to the overall market. This is just further confirmation that the broader market is weaker than a few leading indexes loaded with big-cap stocks are leading on to. The Biotech, DJ-Transport Avg., and Russell 2000 along with the ADVANCE/DECLINE line continue to look extremely weak relative to the three major averages.
It is possible that the market can pick itself up off the floor and continue higher but if it does that it is going to only make things more fragile from here. What this market needs is a real correction and for now it appears we are trying to setup for one. However, it would not surprise us that in a few weeks the market was trading back above its 50 and 200 day moving averages. That is just the nature of this tape and as you can see below there are still some names trending higher producing gains despite the recent market turmoil. However, I must say that their technical based internals are deteriorating in most names. Also it should be noted the stocks below are the exception and not the rule since all of this excitement started in August. Cutting losses fast and quick has been the norm.
For now, continued caution is advised. We have a nearly 70% cash position with only a very small volatility hedge. The market has simply been too V-shaped, volatile, and trendless to accommodate large short positions to counterbalance the long positions we continue to carry on our books (most are listed below). At some point, if the market can knock off this extremely erratic trading pattern, we will welcome any clear actionable signal on the short side in the general market. At the same time, if the market can clean up and start another uptrend, we will be more than prepared to get long any actionable high quality long signals in individual stocks when they trigger.
I wish you all a very Happy Holidays and Merry Christmas. It is a holiday shortened week next week with Wednesday being the final full session. In case you are taking next week off I want to wish you the best and I hope you have a lovely time with your loved ones. I’ll see you in the chat room on Monday. Aloha.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
PAYC long – +116% – 10/30/14
MEET long – +64% – 10/9/15
HCKT long – +37% – 6/18/15
AGRO long – +31% – 10/23/15
FSB long – +30% – 10/23/15
UVXY long – +28% – 12/2/15
NVRO long – +27% – 11/17/15
EPAM long – +27% – 11/18/15
STRL long – +26% – 11/18/15
