Market Report 5/16/16

As you’ve probably recognized by now, each Weekly Market Report I post here starts off as a sort of review of prior observations on the charts and a comparison to how it looks now.

With that said, take a quick look at the weekly chart I posted here 3 weeks ago and the note.

At the time the financial media was practically assuring us the market would be at new all-time highs imminently. The VIX was in the 13’s and the market seemed to be magically levitating, even though tons of big brand-name companies were missing earnings and revenue estimates.

I didn’t really see anyone noticing the “similarity between the weekly candles” like I did when I originally posted that chart. But it seemed like if the following week was red, we’d find ourselves in the midst of that long-awaited pullback I thought would have come sooner.

But the bigger “analog” we’ve been discussing for months played out almost to the tee – with one exception – the duration of the cycle up. As of Friday’s close the SPX is exactly -3.0% down from the recent 2111 high and we find the market in a minor corrective phase.

Here’s a look at the weekly chart now. Click for full-size.

SPX_W_5142016

Everything boils down to timeframe. While we could easily get an up week this week – an oversold bounce or an attempt at one, it’s no mystery the market has been acting weak since that pivot high at 2111 four weeks ago. It feels like the market has been under quiet distribution, even though the indexes manage to almost magically hold up while under the surface a lot of individual stocks have been hit hard.

Once again we find ourselves in a fairly narrow market and if you happen to be holding the wrong stock on the wrong day – look out. I’ve seen more than what would appear to be a normal number of stocks getting smashed for double-digit percent losses in a session or two. This past earnings season created a very dangerous environment.

Just look at AAPL or NFLX. The majority of investors in those two names are underwater and I’ll bet their not happy. For the past couple years the majority of talking heads have been telling everyone to invest in those names. I would call them the “most widely-held disappointments” at the moment.

They have been replaced by AMZN and FB.

Remember all the times I described the market as a popularity contest?

Anyway, back to that Weekly chart. Everything about it says to be cautious in the intermediate-term. That “support zone” doesn’t look very far down, but I can assure you that if it ends up in there over the next few weeks, there will be a LOT of pain. There will be wailing and gnashing of teeth.

I will admit that prior rally exceeded my expectations in duration. I was talking about an imminent dip probably 7-8 weeks ago. I didn’t quite visualize a rally literally all the way back up to the prior high from October 2015.

But there’s something subtle to note. The SPX peaked exactly 1-year ago this week. That high from last October was a slightly “lower-high” and the recent peak at 2111 was also a “lower-high” from the one prior.

So what we have on the weekly chart is a series of lower-highs going back a year and notice the way the MACD is curling down on the chart above. I don’t think too many people are expecting a plunge through that support zone (never rule it out though) but here’s what would probably be worse.

A slow monotonous grind sideways to lower. I think that’s the “pain trade” but we’ll just have to see what happens next. As I said, the market (SPX) is trapped smack in the middle between support and resistance and “the risk is to the downside” as they say. In my opinion anyway.

I was bound and determined to get some trades going last week and honestly the “pin action” just wasn’t there. I painstakingly went through every scan I have, looked at hundreds of charts every day and came up with a list of “halfway decent” ideas early in the week. The best one was USG which we discussed on the show, but it didn’t tag the entry I had in mind.

By the end of the week I scratched a bunch of the stocks off my list. Airlines were setting up but never quite lifted-off and got smacked hard at the end of the week. Financials looked very constructive a couple days into the week then they got hit pretty hard too. Biotech stocks had a very tough week other than a little interest Friday. Most are disasters.

And I don’t even need to tell you about the retail stocks. They’ve literally imploded and while everyone else is asking “is it time to buy?” I’m thinking just avoid the whole sector and avoid trying to play dead cat bounces like so many others will be doing. The retail stocks have been pummeled into oblivion and the fundamentals are terrible. I’ve never been a fan of the sector anyway.

It’s been tough out there the past few weeks – not unexpected.

Now that earnings season is about finished the bright spot might be share repurchases kicking back in. I don’t know if you caught it but Goldman Sachs made an interesting statement recently “Corporate repurchases are the main source of US equity demand”.

Financial engineering is alive and well and the consensus is that there’s no way the Fed is going to raise in June. So those two things combined are the likely reasons we might get that “slow grind” I mentioned instead of just rolling over.

I pay attention to what’s going on under the surface and I don’t even have time to get into the Russell 2000 here or how many small stocks aren’t acting anything like a market still up near the highs. We just have to be careful and selective.

I think the key is identifying certain stocks that can be traded for quick in and out gains. The tricky part is that almost every sector right now looks bad. The charts just don’t good overall. the one bright spot as I’ve been mentioning here for weeks is the gold and silver mining stocks. And even they have these 1-3 day periods where they are on the biggest % losers list.

Essentially what’s making the current environment so tough is this. There seems to be a “rolling rotation” among sectors that only lasts a day or three, then that sector gets hit. One day the energy stocks are strong, maybe that carries to the next day – then they reverse. Biotech stocks get a 1-2 day rally, then they get smashed. It’s like a herd of bulls stampeding in and out of each sector then changing direction a day or two later.

The big issue here is follow-through.

As you know one of my favorite scans is to look for stocks that have been trading below the 9-ema for a period of time, then move above it. That doesn’t necessarily mean it’s a buy right then – the subsequent price action is key. And what I’ve noticed the past week or two is that many setups are just “traps”. Last Tuesday the market rallied all day for no apparent reason and it was one of the most unusual “trend days up” I’ve seen in a long time and it turned out to be a trap.

So let’s be careful here and I’ll do my best to find new ideas and avoid all these traps – which should be a lot easier now that earnings season is winding down. Honestly that was one of the main stumbling blocks recently – it seemed like every time I found something that looked good, earnings were imminent. But now that we are through with that for the most part and now that we’ve had a bit of a pullback, I’m hopeful for a slight reprieve and perhaps a little bounce this week and possibly some tradeable strength.

We’ll just have to see. In the mean time I have some stocks on the radar with constructive charts and will be following along to see which ones might set up or break out.

Click here for a small list of stocks that are worth watching going into the week.

We’ll go over those on the shows and also look at others that will pop up as the new week starts and we see which sectors seem to be leading the popularity contest. As I posted here many weeks ago, this is really the sector that interests me the most.

I’ll see you on the shows this week and we’ll take it from there.