Market Wrap - From The Week Ahead: Avoiding The Big Money Blues
Even though stocks gave up a good part of their gains on Friday the S&P 500 was up 0.3% for its first gain in four weeks while the Dow Industrials closed down a fraction. The action in some of the other averages was more impressive as the Dow Transports were up 2.2% while the Nasdaq Composite gained 1.1%. The weekly advance/decline ratio was slightly negative.
Half of the major sectors were higher last week led by technology's gain of 1.8% and a 1.5% rise in the oil & gas stocks, health care, financials and materials were also higher for the week. The other five sectors were lower as the utilities lost 2.3% while consumer services dropped 1.7% for the week.
According to AAII the individual investors have become even more skeptical about the stock market as the bullish% reading dropped further to 19.3%. Over the past 29 years it has only been below the 20% level 30 times. The VIX is still at very low levels as it has failed to break out on several attempts.
The weekly A/D lines on the NYSE and S&P 500 are holding near the highs and are still well above their rising WMAs. The daily chart shows that the NYSE rallied up to its 20 day EMA and former support, line a, on Friday. The NYSE A/D line has turned up but is still below its WMA. A move above the May 10th high is needed to indicate the correction is over. The McClellan Oscillator dropped below support at line d, last week before Friday's rally. A strong move above the zero line and the long-term downtrend, line c, need to be overcome to signal a change in the trend.
There were mixed signals from Friday's close in the Spyder Trust (SPY). The close was above Thursday's doji high which is a short term positive but the day's high at $206.10 was just barely above the still declining 20 day EMA. This is typical of a rebound in a downtrend but to signal even lower prices the SPY needs to drop below Thursday's low at $202.78.
The S&P 500 A/D line has turned up after slightly breaking the support at line c. The A/D line is still below its declining WMA and the downtrend, line b. This resistance as well as the May high (see arrow) need to be overcome to signal that the correction is over.
The most positive signs last week came from the technology stocks as the PowerShares QQQ Trust (QQQ) was up 0.9% but was not able to close above the weekly doji high at $107.50. The quarterly pivot at $104.74 was tested again last week but appears to have held. The weekly downtrend, line a, is in the $110.30 area with major resistance in the $114-$115 area.
The weekly Nasdaq 100 A/D line has turned up after testing its WMA and the former downtrend, line b. This is potentially a quite bullish setup. The daily A/D line (not shown) has moved back above its WMA after appearing to hold the support from late March. A few more positive days of market internals is needed to push the A/D line above its downtrend.
On Friday the small cap iShares Russell 2000 (IWM) did much better than the SPDR Dow Industrials (DIA) but the A/D lines for both are still in their downtrends.
What to do? After a very strong market rally from the February 11th lows to the latter part of April the stock market started to move sideways. The deterioration in the A/D indicators and volume suggests that the risk on new long positions was increasing. The high level of complacency also indicated the market was vulnerable.
This kind of deterioration can be followed either by a sharp drop of 5% or by a period of sector rotation. Risk management plays an important part in my recommendations. I would rather stand aside and avoid possible corrections then buy when I felt the risk was high.
The current low level of bullishness and the fact that very few participated in the rally from the February lows does allow for another strong rally. There is the potential for new highs in many of the major averages. This should be signaled in advance by new up trends in the A/D lines. Those investors that embarked on a dollar cost averaging program earlier in the year should continue to buy a regular intervals,
An important part of both the Viper ETF Report and the Viper Hot Stocks Report are the Trading Lessons that are sent out every few weeks. There are designed to help subscribers better understand the markets. They are quite detailed with many specific examples.
Last week's two part Viper Trading Lessons focused on my A/D analysis and also featured examples of how combining the weekly/daily analysis could have helped one sidestep past corrections.
New subscribers to either service (just $34.95 per month) get the three latest Trading Lessons including: Also available from WentworthResearch@gmail.com for $8.99 each or three for $24.99.
Finding The Best Entry Levels
Finding A Good Exit Price
Telltale Signs of a Correction