Stocks staged a pretty impressive rally overall on Friday with all of the indexes putting in a nice reversal off the early morning lows combined with a strong close. Unfortunately for the bulls, volume was mixed and leadership was weak with the majority of the gains going to Defensive related stocks. While the Nasdaq is finally at oversold levels, the rest of the market remains mid-range on all of my momentum oscillators suggesting that further lower prices could very well be in store. For now, the bounce is good but it is definitely not good enough to say for certain that we have seen the lows of this pullback.
My biggest tell that we could definitely have seen a short-term top is the fact that my technical patterns have deteriorated quite significantly the past two weeks. The pullback started off innocent enough with plenty of stocks still showcasing pretty bullish patterns but as the selling has progressed more and more stocks have staged some pretty brutal reversals and/or have simply lost the nice technical formations that they were building. It is not like we had a lot of beautiful setups to begin with following the rally off the February lows but the past two weeks have taken the few nice patterns out there and thrown them on their face.
Another problem is that the rotation out of Defensive names into some growth related names that we started to see in March has completely re-reversed with Defensive stocks now leading the new high columns. Defensive related industry group stocks remain the only area of the market where I can still see some bullish stock patterns. Those patterns are not that bullish right now as they have seen quite the volatility during this recent decline off the April highs. The bottom line is that there are few actionable patterns right now and those that are actionable are not in any industry group that screams bull market.
We have raised a significant amount of cash during the past few weeks with our long positions now making up around 45% of my portfolios. I do have a small leveraged volatility hedge but overall basically just have raised a ton of cash here as I wait for the market to make up its mind on which way it ultimately wants to go in this large trading range that we have been in for a year now. The 2015 highs and the February lows is basically one large trading range and until we get some movement above or below this area on volume, you can be sure that this market will stay more volatile and range bound than trending in the short term.
We recommend staying very neutral here on the short term allowing one’s stops to either keep them in or take them out of any current long positions that one might have here. Our market models are still under operational BUY signals in every index except the DJT, COMPQ, and NDX. It will not take much more selling to knock the rest into the NEUTRAL camp and a close below the recent lows in the Nasdaq and Nasdaq 100 will have both of these indexes under SELL signals since both are trading below their 50 and 200 day moving averages. This tape’s uptrend was not healthy to begin with and it is a lot less healthy now after the pullback from the April highs.
I am going to continue to monitor my stops closely in the names that I remain long so that I can make sure to lock in profits on the stocks that are showing me gains. As for the stocks that are barely higher right now or that are showing me extremely small losses currently (like IGT) I am going to make sure that I leave either break even or with extremely tiny dollar loss amounts. The bottom line here is that if all my stops get hit in the next few weeks, I will still have gains YTD. I know a lot of traders that have already given back their gains from the February lows to April highs and do not plan to be one of them.
Alright everyone. It appears cash is slowly becoming king once again. This is definitely not the time to be a hero. Overall we are in a huge trading range in a very seasonally weak period to be long stocks. May-October is a very poor period for stock investing. Sometimes it is not but history suggest that swinging for the fences here without any real confirmation in the overall market is a very dangerous proposition. Trade accordingly. I’ll see you in the chat room on Monday. Aloha, have a great weekend, and I wish you the best during the upcoming week.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – DATE OF SIGNAL
CLR long – +106% – 2/11/16
GRAM long – +61% – 4/1/16
HBP long – +28% – 3/28/16
