I posted this on TheStreet.com this week. I'll gather the graphics if anyone wants. If not, it still expresses my observations after 5 trading days this week:
"It's time to get in gear after a few weeks away from Mr. Market. We lose our trading rhythm when we head to the beach, but we don't realize it until we return to our desks. Disorientation then strikes, and we forget everything we knew before that first margarita. When that happens to you, take a giant step back and review your plan from a safe distance.
Last week's trip to Europe kept me out of touch with the latest market swing. So I looked at a few hundred charts when I got home, and started to write down my observations on paper. This analysis quickly jogged my memory and forced a number of changes to my watch lists. It also gave me a detailed plan of attack for the coming weeks.
Here's the new playbook that followed my quick review. I'll be watching to see how the ticker tape converges or diverges with these observations. This continuous feedback loop keeps me honest and helps me adjust quickly if I'm wrong.
Observations
1. There's no leadership at all right now. I took 239 industry groups and sorted them by relative strength. Only three groups fell into the top 10%, and a mere handful in the top 20%. This is hideous. There have always been strong sectors in this bear market, but they're getting very hard to find.
2. Bad news is getting punished severely, while good news is getting rewarded for a day and then forgotten. Take a look at Alkermes (ALKS:Nasdaq - news - commentary - research - analysis) or JDA Software Group (JDAS:Nasdaq - news - commentary - research - analysis) and you'll see this decimation at work. But that same intensity is missing on the upside, even with precious metals and defense stocks.
3. Most stocks at new highs are showing no follow-through at all. Running uptrends have been confined to a handful of small-caps and special situations. Most breakouts to new highs just sit there for weeks or roll back into resistance.
4. Many growth stocks have stopped falling and are basing at broken lows. Issues like Microsoft (MSFT:Nasdaq - news - commentary - research - analysis) and IBM (IBM:NYSE - news - commentary - research - analysis) are exhibiting short-term, bullish divergences. The flip side is that many former leaders in the defensive sectors look very vulnerable to extended downtrends.
5. We are in a multiple-week test of last September's lows. Price dipped below those levels on some indices but not others. Price rate of change actually turned up on the major averages in the last few weeks, after declining for most of the year.
6. We have three waves down on the weekly Nasdaq Composite. The first and last waves are the same length in time (seven weeks), and all three are the same length in size (400 points). In Elliot Wave Theory, this completes one leg of a primary downtrend and sets the stage for a countertrend rally.
7. Economic numbers have been close to expectations, but we're more focused on external news than on market internals. The problem is that most investors are still afraid of their own shadows. The relatively good news is that the terrorist threat hasn't lived up to its hype just yet.
Conclusions
1. Short-selling risk will increase through the summer. The multiweek lows should put a floor under the market and shift power back to the buyers, at least in the short term. Symmetry between the S&P 500 and Nasdaq (in price and time) suggests we're at the start a new cycle that could carry the averages higher for a few months.
2. There should be a shift back into growth stocks over the summer as they bounce out of their short-term bases.
3. The shift out of defensive stocks will continue and trigger good short sales.
4. We'll also shift to an internal market view during the earnings season. Investors and traders will forget about scandals if there's money to be made on the long side. CEO crooks get a lot of press because prices are falling, not the other way around.
5. A bounce here will still be countertrend and hit strong resistance quickly. The most obvious scenario would be for the market to set up a summer rally and a September selloff.
6. On a bounce, the Nasdaq 100 Unit Trust (QQQ:AMEX - news - commentary - research - analysis) resistance levels will be at $29-$30 and $33-$34.
7. There will be more money to be made on the long side than the short side until the fall months. The big moves will come in the big-caps rather than small-caps." |
