Weekend Review 05/25/12

Tao gives birth to one,

One gives birth to two,

Two gives birth to three,

Three gives birth to ten thousand beings. --Tao Te Ching

If there is one unifying force to market structure, it is contraction/expansion. The Tao is an expression of the expansion cycle. A rattle snake that coils then strikes exemplifies the movements of contraction/expansion. Throughout nature this pattern repeats. A cloud releases rain (cloud contracts, rain expands) that in turn can turn to ice (expands) which can then melt (contracts) then turn into steam (expands) and becomes a cloud again.

 

What we can learn from this sequence is that once a cycle begins it has a tendency to carry this momentum forward. Price that slows will continue to do so for some time and price that accelerates will continue to do the same as well. Additionally empirical evidence indicates that these burst of momentum will last from 3 to 5 days and that the directional probability of expansion and momentum burst moves with that of the prevailing trend.   

Three weeks ago there was a narrow range on the weekly chart of the NASDAQ and the hypothesis at the time was to expect an expansion in range and follow through in the direction of the move. The first two events did occur, however there was a lack of follow through as the market paused this week.

NASDAQ Weekly

Scoping in on the daily chart a few more details stand out on this time frame. First, a pivot low has been established as the market paused this week. This will now act as a key inflection point for as long as price holds above this level an assumption can be made that a new range is undergoing formation. Second, this week also saw volume drying up so a pause here with a lack of participants particularly after three down weeks is not unexpected especially when coupled with a holiday weekend. Lastly, the past two sessions have showed range contraction with back to back NR7 days. Sticking with the hypothesis that range expansion occurs after range contraction, on the daily time frame the market is due for a move which can lead to further price erosion if the break is to the down side, or a rally within the larger context of a weekly downtrend if it breaks to the upside.

 

NASDAQ 05/25/12

Currently there is still the issue of Greece and a number of other macro events that are pushing noise into the markets and increasing volatility. Coupled with internal market structure, the psychological tolerance of risk on/risk off can be expressed by the relative strength of sector ETFs to the SP. Taking two data points, the market peak and the first of May, it is clear that the current market is still defense oriented with risk off. Utilities and Consumer Staples have outperformed the general market since March 19 and have barely underperformed over the previous month. Tech, Energy and Financials have underperformed with Telecoms doing the worst on both time frames.

Sector Strength

Further using the XLP and XLY consumer sentiment and optimism/pessimism can be gauged by the performance of discretionary or staples. Looking at the XLP, since the market peak there has been an orderly range forming with price near the highs and a consistent volume pattern.

XLP

Looking at the XLY, the range formed since the market peak has been much more erratic and briefly broke the downside and is now retesting that price point. Additionally the volume pattern has been much more erratic with down days showing spikes and a general increase over the up days.

XLY

General market volatility continues to rise as does the uncertainty with news stories filtering in daily. The consensus ebbs and flows from things being bad to not so bad to tolerable to manageable to meaningless to contained that it's basically a coin flip each say as to which news cycle will be the theme.  The way I see it, these are the times to bunker down and reduce the hiss and look at how the information passed off from the market indicates what type of conditions we are now under: risk on or risk off, and not what the bobble heads are regurgitating from the Lehman/Bears collapse because just as market internals repeat the contraction/expansion cycle, news pundits repeat the head in the sand caterwauling and are clacking their teeth like it's 2008.

Weekend Review 05/18/12

The market has been running on fumes since late February and was in need of a cleanse. The move from late December to January was swift and since then the number of stocks that continued to lead the indexes higher was becoming increasingly narrower by the month. The Russell continued to lag indicating a lack of risk appetite as small caps fell out of favor and money flowed continually into big cap tech.

This week closed out with all major indexes having pulled back at least 10% over the past two months. In addition this week ends with a number of breadth indicators denoting that the market is oversold and a bounce on the near term is highly probable. So based upon general principles it would seem that a tradeable bounce to the upside is on the horizon this week but whether or not this stabilizes a near term market bottom to rebuild constructive bases off of is debatable.

In addition this week ended with all major indexes confirming Stage 4 Markdown by closing below their 30-Week moving average. Using the Russell over the past two years we can see that in 2011 the first close below this average did indeed lead to a bounce that lasted four weeks before rolling over and ultimately breaking the pivot low before eroding much further. Also of note, over the past two years there the Russell ended this week very close to where it closed 2 years ago. While there has been oscillation between this period, essentially the Russell has been in a wide range.

Russell 2-Year Weekly

Two other pieces of information this week that caught my eye were the USHL and the T2107 (the number of stocks above their 200 period MA.) which indicate that the market internals are not confirming market exhaustion. Comparing these numbers to a year ago, internally the market structure is not dissimilar to where it was in early August after the first wave of selling hit in late July. So while a number of breadth metrics indicate the market is oversold on a technical basis and a bounce may be on the horizon, it clearly has not reached exhaustion nor capitulation as a number of stocks are still holding up well enough as of now.

USHL 05/18/12

T2107

Further evidence comes from the Market Monitor Primary reading which has yet to reach the extreme readings from August through October of 2011. This affirms that there are still a number of stocks this correction has yet to ding. Until this breaks down further, the hypothesis is that any bounce will be reflexive and that the market needs to erode further then take time to rebuild bases before a sustainable move to the upside can begin.

MM Primary 05/18/12

  

Overall it is abundantly clear the market is in bad shape and has the potential to erode further.  While a 10% pull back is a sign to become optimistic, there's no reason why things can't continue down another 5% or more.  The persistent selling over the past two weeks has been methodical and while there have been pockets of capitulation in some individual names there hasn't been urgency to unload at any price.  The conditions are there however, just as there are conditions for a bounce so the reaction to either of those scenarios will give further clues as to how this will play out.   

Persistent Selling

4% +/-

10 Day 4% Differential

Selling has been picking up over the past three sessions and the clear negative trend can be seen by the the down days over the past 10 sessions.  Even though selling is picking up, it hasn't been the type of capitulation selling that leads to the exhaustion to the downside.  Looking at the longer term Primary this move is measured and setting up thus far like area A rather than area B.

Primary Trend

As noticeable here, when overwhelming selling hits the tape a spike in the Primarily will be soon to follow.  As of now this has been much more methodical, but one blowout day can quickly change this assessment. 

Pockets of Strength

With the market appearing to be breaking down it's been easy to lose focus on the positive and constructive action over the past few months that resulted from the long range --namely setups.  While much has been weakened there are pockets of strength that are beginning to emerge.  The following is a list of stocks that have made a 25%+ increase from their low over the past 3 months and traded at least $1M in dollar volume today.

52 Pick-Up

AEO

AMZN

AOL

CHSI

EQIX

EXPE

GNC

GPS

LEN

LNKD

MNST

RYL

SWI

TRIP

VSI

From this list some themes begin to emerge and while not all of these will hold up necessarily, it's important to begin building watch list and being prepared for when things finally shake out and the next leg of the journey commences. 

Skipping Stone Pattern Completes

Russell Goes Kerplunk

Today the Russell finally cracks the low end of the range that established a key pivot on 03/06.  It's been obvious from the lack of market direction that the sentiment has been risk averse, but this may just crack the back.  Unless there is follow through however, this as noted many times is still a range and could easily gore over exuberant bears.

Weekend Review 05/11/12

A month ago when earnings season kicked off I opined whether or not this would be a lost season from an index perspective where little would be noticed. Considering the NASDAQ is less than 2% where it was from when the season kicked off, this hypothesis is playing out. What I wasn't expecting however, was the magnitude of some of the drops that occurred with many stocks moving into the bargain bin over night. Overall the NASDAQ is currently down 6% from its recent high.

Using a minimum volume filter of 100K+ volume over the past 3 sessions my Worden Common Stocks universe filters down from 5776 to 2721. Of these remaining stocks I've chosen to sort them by Price Percent Change 30 Days and Relative Strength against the NASDAQ since its peak.

During the past month there have been 651 stocks that have had double digit drops. 218 have had 20%+ drops. Notable drops during this time have been BODY down 46%, MAKO down 44%, GMCR down 42%, and FOSL down 40%.

Comparisons based upon relative strength to the NASDAQ, 1418 stocks are down 6%+ from the peak, over 50%. 1043 have had double digit draw downs and 429 have had draw downs of 20% or more.

The underlying vehicles that make up the indexes have been crashing and burning with frequency as of late but one wouldn't really notice this from the indexes which still look like a pristine country highway with a scenic overlook and historical landmark. But it's a windy road none-the-less and rubberneck too long and the side of the cliff looms unnervingly close.

Zooming out and looking at the Russell on a weekly chart it becomes clear that there is a range within a range with the current price action being tidily boxed by the larger range of a year ago.  If not for the correction that began in July of last year it's almost as if nothing has happened. 

Weekly Russell

Looking at the daily, the pattern has looked bearish for some period with price at the bottom of the range. When I look at the price action I'm reminded of being next to body of water on a rocky bank scanning for the perfect stone to skip across the water. The distance of the first few skips begins to narrow as the stone skims across the surface and with each bounce narrows further still until eventually it simply sinks to the bottom. This market continues in its resiliency as noted before so perhaps there's an embankment across the way that prevents the stone from sinking and simply places it within range of where it is now.

Skipping Stone

Scoping out the NASDAQ on a weekly basis what immediately stands out is the volatility compression as price traded in a very tight range.  From range contraction comes range expansion so a move in either direction with follow through will be a significant move to pay attention to.  Additionally volume over the past few weeks has been light relative to the previous few months but it is worth keying in on the increase in volume week over week as price had drifted downward.

NASDAQ 05/11/12

The $USHL5 currently looks neutral as it currently stands at -12.  A new rally will need leadership to the upside so until this shows broader based support the assumption is that the market is still not healthy enough for upside continuation.

$USHL5 05/11/12

The Primary Trend Signal that I use has been squeezing and signaled bearish over the past week.  Currently it has been mostly flat so any further erosion to the market should show up with in increase in the red line.

Primary Trend Flip

Currently the shorter term breadth readings have shown a modest increase of selling to buying.

4% Advance/Decline

This negative slant shows up in the accumulation of this metric showing that selling has been more dominant as of late.

Buying/Selling

Until further notice it is still a range.  Unless some significant change occurs in either direction it is still a wait and see environment. 

Pros Vs. Joes

Years back there was a program called Pros Vs. Joes that pitted mostly middle aged former professional athletes against mostly middle ages former high school all-start in feats that ranged somewhere between Battle of the Network Stars and American Gladiators.  It was a tepid program at best and I willfully admit to watching an entire marathon one Saturday afternoon because I needed something to distract myself after finishing a turn of Civ III, or a cigarette or a beer.

I didn't know whether to cringe at the deterioration of the Pro or laugh at the near futility of the Joe or feel completely ashamed of myself watching this while drinking a beer, smoking a cigarette and playing Civ.  Suffice to say that in most of the competitions the Pro still outperformed the Joe, but on occasion the Joe outplayed and outlasted his competition.

What's all this leading up to?  In some ways the market is a contest between the pros and the plumbers.  But sometimes the Joes get the call right which brings me to this weeks sentiment survey.  Typically when fear ramps up among individual investors it is time to put on the contrarian hat and be prepared to act on the opposite side.  This weeks AAII Sentiment Survey shows a 13.6% increase in bearishness over the previous week which results in the highest reading since 10/06/11 of 42.1% while bullishness decreased 10% to 25.4.  In contrast the Investor Intelligence survey shows no decrease in bearishness over the previous week (20.4%) and also shows only a modest drop of 4% in bullishness from 43% to 38.7%.

What we have here is a very clear difference of opinion between the Pros and the Joes.  With this divergence and the belief that when the AAII survey gets bearish it's time to begin to get bullish, the edge here would appear to go to the Pros, but it's also good to remind ourselves that on occasion the Joe does make that trey.

As a side note it does beg the question, "With deteriorating breadth, bearish chart patterns, and macro woes in China and Europe why are the Pros so nonchalant?"
 

Knock Knock

NASDAQ 05/09/12

Currently the NASDAQ has pulled back 6% in an orderly fashion.  If the current move is a 4%-7% pullback then a bottoming formation here would be in keeping with this belief. If it becomes deeper, then the next logical price point to pay attention to is the 2810 zone --a 10% pullback.  Of note is the increased volume here which could go either way depending upon how the rest of this pattern plays out.  If price bases here then there is volume supporting the lows, however if price breaks further then the interpretation become further distribution while the index churned.

The topping patterns that the indexes are forming can not be validated until there is an actual break down and thus far it still continues to be a range, albeit with an increasingly bearish bias.  Over the past ten sessions selling has picked up slightly although not significantly and the underlying breadth numbers are modestly bearish but not extreme enough to indicate this is the actual floor.  It does feel like a pins and needles trading environment and there is a lot of anticipation building about a potential break down here so the only thing to do is allow time to play this out.

Weeble Wobble

NASDAQ 05/08/12

Yet again the market has shown resiliency. Not only is every knockdown becoming a standing 8, just when it looks like it's about to drop for the third time in a round the bell rings. After being down nearly 2% for the session, the NASDAQ rebounded off the March 06 low on the highest volume since December 16 and closed positive for the day. On the surface the appearance that this is an orderly correction continues evident by the relatively small number of stocks down 4% on increasing volume --178.

That being said, I continue to be somewhat suspicious of this perspective. While the number of stocks down 4%+ on a daily basis gives little indication of forced liquidation at this point; the fact that this earnings season continues to give 50% off haircuts to many stocks suggest to me that the reason there isn't much selling on a daily basis is due simply to the severity of price shocks. Once a stock gaps down 50% overnight how much more distance should one expect it to move before it starts to become a value play and look attractively priced?  True, some like NFLX, GMCR, and HLF may be permanently damaged and continue to erode further, but this isn't the case for all.

Today the flush was lead by FOSL which dropped nearly 48 points or 37.57%. This led to selling in associated stocks such as MOV, LULU, PVH, UA, RL etc... What's worth noting is that while FOSL closed near the end of its range, many of the others found bids and recovered much of their intraday losses.  This suggest that while there maybe overall weakness in retail, something may be seriously wrong with FOSL.

FOSL

MOV

PVH

RL

MAKO

SNCR

Tomorrow there will be another crop of earnings losers but as of yet there hasn't been evidence of sequential follow through to the downside as the market continues to find supporters. All things considered we are still in a range and although it continues to look tenuous it still holds tenaciously.

Further Deterioration

A .05% up day on the NASDAQ looks sedate on the surface, however the indexes continue to mask underlying weakness as stocks are breaking down with force.  With most of the major indexes at key inflection points, if many more stocks began to fall apart it may not take much to be a tipping point.   

CTSH

PETS

WTW

TPX

Weekend Review 05/04/12

For this weekend's review I thought I'd post a cornucopia of charts primarily with GMMA as an indicator.  First a look at the Russell which continues to under perform shows that the head and shoulders topping pattern may still be in play.

Russell 05/04/12  

The same time frame using GMMA shows that the shorter term averages have been unable to align above the longer term averages and that the longer term averages have been squeezing and are in the process of rolling over.  In the application of GMMA this indicates that investors are not fully supporting the current price and that without their support the market moving higher is questionable.

Russell GMMA

The same weakness the Russell is exhibiting has not become as apparent upon some of the other indexes.  In part this is due to the internal construction of these indexes and what they track as APPL, PCLN, CMG, MA etc... have had significant and slightly distorted impact upon them, so if the weakness does carry over it will be  more evident should these stocks begin to falter.

Nasdaq 100

NASDAQ

SP

Wilshire 5000

The next series of charts relate to sector strength.

Sectors ETF Compared to SP

Sector EFT 2

Price Percent Change Month, Sector ETF

XLP

XLU

DVY

XLV

XLY

XLI

XLB

XLK

XLF

XLE

XLT

Using GMMA we can ascertain with more clarity what has been trending firmly and what has been oscillating and/or breaking down to gain greater insight into where money is flowing into and where money is flowing from.  The market looks like it is posturing defensively here and considering the number of macro events underway from sovereign debt issues to elections the unwinding of these near term implications likely be the greater influence upon the market until the market itself once again becomes the focal point.