robreke 2016 weekly market update # 2.
The indicators I follow are still strongly on a sell signal. Things look ugly at least short term. There is typical market correction behavior today; that is the market starts up strong in the morning, ends barely up on a whimper.
Some of this will kind of be a recap a few things from last week as conditions are persisting:
Looking at nasdaq composite - The picture of distribution ( market having bigger higher volume down days ) has not changed much. There are lots of distribution days piling up. Even if we get some accumulation on the up moves, it’s met with immediate distribution.
Ideally, if we're beginning a credible rally, you'd want to see accumulation with light to no distribution for at least the first 1 to 2 weeks. we’re seeing the opposite now. That is, distribution and weak to no accumulation.
My sell signal has been effective since december 10th.
We’re down 1600 points on the Dow since then.
The Russell 2000 ( small cap stocks ) is underperforming worse than large caps. There is a classic 'Head and shoulders' top where it broke below it’s “neckline” Not a good technical sign. The head and shoulders is a bearish chart pattern:
The value Line Geometric Index, which is a broad based index containing many stocks from mid cap to large cap, is in a full fledged bear market. It's down over 25%
Only 15% of stocks on the nasdaq are above their 200 DMA now. This is representative of a good wash out so far, but by no means indicative of the bottom.
I mentioned this last week, but anytime the ECRI weekly leading index, has gotten below -5 it has portended a recession. You can see how far below it pierced during 08/09:
http://www.advisorperspectives.com/dshort/charts/indicators/ECRI-WLI-YoY-since-2000.gif
^ The key now for this index is watching the recent lows which occurred twice in 2015 ( approximately -2.5) As long as the indicator holds above this level, it appears the possibility of a severe recession is limited.
If, however, it pierces that 2015 low or worse yet, the -5 red line, a recession and bear market are quite likely.
In summary:
* A market bounce is quite imminent
* Volatility likely to rise
* Fed tightening
* Poor stock setups/no stock set ups.
* Cash is king!
For those that want to trade individual stocks ( or like doing options ) I think the key to good trading is to operate in a vacuum and go to the beat of your own drummer. Find a trading system that works for you that you're comfortable with and ignore what everyone else is doing or how much more money they’re marking than you at any given time. That will get you distracted, doubting your system that has worked for you and you'll start trying to "tweak" things. At that point, what usually happens is the wrong picks become bigger losers and the account value starts to suffer.
At this point, I'm expecting a shorter lived sharp decline that causes some fear but not a full fledged bear market nor a catastrophe like 2008. That said, things can change if some of the indicators I've alluded to go sideways.
The Nasdaq is coming to a support area so we’re due for a bounce. Recent low a few months ago is 4294. Look for potential bounce here.
At the same time, who’s to say these support levels will hold?
Option puts can often be a good indicator of sentiment when reaching a bottom. The current put numbers do not seem to indicate a bottom. There is an indication in this indicator that we’re seeing some bearishness ( good contrarian indicator) however.
As mentioned last week, the Conditions for a major bear market are:
Extreme deflation
Rising inflation
Inverted yield curve - fed tightening
Overvaluation - very high PE ratio SP
1 or all of these have existed in major bear markets.
We don’t have extreme deflation but we are starting to see deflating of the economy. Also,there is no inverted yield curve, however, with the QE manipulation, who's to say interest rates are "real" right now.
Another indicator: When Industrial Production gets below -1 historically, it has been the trigger point for market tops/bear markets. We’ve tripped that in the last reports for the first time in a very long time. I don't have a chart for that one but it can be googled.
This indicator hasn’t gotten a market correction wrong since 1919. At this point it appears the market is discounting the
possibility of a recession.
Time will, of course, tell. For now I prefer to be happy with cash and wait for the washout to occur, new constructive stock patterns to emerge and new leaders to eventually begin their advance once the next rally is in place.
