AAII Investors are showing their defensive posture; looking for stocks to pullback.
Looking across the blogosphere as well as articles from media outlets it is hard to miss what the majority are looking for in terms of direction from this market. Every Tom, Dick, and Harry are looking for stocks to pull back from current levels to offer up an opportunity to get long. Stocks have been in a steady uptrend since March’s follow-through day but have been slowly creeping higher since the end of March. If you notice pullbacks have become tighter, but when stocks move higher their percentage move hasn’t fallen. Volume might be below average but accumulation is occuring in the market. Many may be positioning themselves to chase equities than catch them on a dip.
The most notable sentiment indicator AAII Bull vs Bear Index shows Bears ruling with more than 40% of respondeds are bearish. Looking deeper into the survey 45% of AAII investors are in CASH! By far the highest level of cash in the history of the survey. Again, those in the stock market have positioned themselves “trying” to catch a dip in equity pricing. Let’s not pass on only 41% of AAII investors are in equities, by far the lowest in history of the survey. In addition to the AAII survey the II survey of Stock Market Newsletters continues to show more Bears than Bulls. The crowd is certainly bearish in the near term but the market continues to fight off pulling back.
The NASDAQ has been under a tremendous amount of accumulation since the March follow-through day. The Dow Jones Industrial Average has been a lagging index as well as the S&P500. Many might see this as a blemish on the market but I see it as a “GOOD” thing for the market. We need to see the appetite for growth stocks to grow and those growth stocks are in the NASDAQ not the Dow. The IBD 100 index lead all indexes last week with a 2.8% gain; the market is telling us growth stocks are the place to be.
Remember, do not get caught with opinions on the market and go with what it is telling you. Do not get caught chasing equity prices; it is a terrible position to be in and the number one rule of cutting losses will get you in position to grab gains.
Last week Tuesday’s and Wednesday’s action was bullish; finding support at the lows to finish near the highs of the day. However, was it simply an example of a tired market? Thursday’s trading session was the tell that this market has simply moved too much in so little time that a rest is needed. Friday confirmed Thursday’s action by not being able to retake the highs of Thursday on volume. It would have been a tremendous bullish signal if the market had erased Thursday’s losses and had done it on big volume. I think it is time to become defensive in posture and prepare for a possible pullback.
After a move like we’ve seen from stocks off the most recent lows is very brisk move higher. We’ve stayed overbought since the March follow-through day, quite a long time to stay overbought. It wouldn’t surprise me if stocks pull back 5-10% off the intraday highs set on Thursday. Today’s open will certainly have the index challenging its 20dma, but if we can rally off the open and finish higher on strong volume it would signal the market still has more room to the upside. Letting reality set in, I don’t believe this will be the case as we haven’t seen any of the IBD indexes lead this market while it has made its move higher. We’ll need to see how stocks act this coming week.
If I were looking to make a move I’d be looking to short some Big Cap Technology stocks: AAPL BIDU RIMM QCOM INTC. These laggards have been rallying on less than ideal volume. They are liquid enough to avoid being wiped clean on a strong move higher. Big Cap Technology is an ideal way to take advantage of a market turn.
Though I’ve lightened up on GMCR this week, I’m still holding a core position in the event the market continues with the rally at some point. It’s been my biggest winner so far this year and, should the market indeed march higher, it certainly has the potential to lead the way. That remains to be seen, however. While some “leading” stocks like MDAS, STAR, INT, NTES and TNDM have hung in there, others have simply been taken out back and shot. First they came for MYGN and I did nothing, then they took ALGT down….so who’s to say GMCR won’t be next?
Given the whipsaw nature of the market at present, the best advice today is the same advice Gerald Loeb offered back in 1961: keep those trades short-term. It’s far better in this environment to get out of a stock too early than too late. Things can change quite rapidly. And in the words of David Bowie: “I’m much too fast to take that test….”
Success! The Obama administration along with the Treasury Department and Federal Reserve Bank have successfully re-inflated prices. However, to the downside many will feel the pain of higher prices. Simply re-inflating the monetary base, effectively making everything cost more will not help those without a job. In addition, those on goverment welfare will now demand they receive more in benefits due to the rise in cost of living. One big issue, the government never addressed the issue at hand and continues to avoid it. Natural business cycles occur as businesses boom, plateau, and some business die. It is quite natural, but when the government steps in and artificially props up bad business you are simply throwing good resources after bad rather than productive resources. Thereby, you are delaying the ability of capital to be put to effective use and kick start the economy once again. Look for inflated prices to stay and move higher while the economy will effective stay STAGNANT.
Although we’ll be in a stagnant economy it does not mean we will not have opportunities to make money. We’ll need to focus on the best in the best industries. This is where we’ll find the excess capital flowing to. Medicoracy will not be tolerated as consumers will have little excess capacity to spend and will only spend it where they feel they are getting the “BEST.”
I am certainly looking for inflated equity prices as capital will flow to assets that are seen as places to beat inflation. Stocks and commodities are always seen as assets you need to own during inflationary periods. Gold, silver, platinum, copper, agriculture, grains you name it for commodities it’ll be the place to be along with stocks. Unfortunately, the downside will be those who are dependent on the government will be left behind and suffer the worse. If you are on government support or know someone who relies on the government I’d suggest pushing them to be self-reliant because the US Government may not always be there.
Remember, always cut your losses short and your winners grow.
Many have predicted the bursting of the US Treasury market, but many were simply too early. Wednesday’s widening of the yield curve proves that the great unwind of the treasury market has begun. Those who hold Treasuries are worried, not about low yields, but the ability for the US Government to pay back the existing debt load. Obama’s $1.75T budget deficit continues to loom and fuels the fear within the Treasury market. China is now worried we are simply going to print our way out of this mess. In other words, we are going to monetize the our debt. Throughout history this has been done many times and in every single case the currency COLLAPSES.
Stocks took the widening of the yield curve very badly as the NASDAQ slide around 20 points in 20 minutes. Yesterday marked the 5th distribution day for the leading index: NASDAQ. Remember, between 5-6 distribution days signals you should be raising cash by selling laggards and trimming back your winners. Simply put, it is an insurance policy against further downside.
Moving back to the Treasury markets one does not have to look too far to see the collapse. Just take a look at TBT and TLT. Those two Exchange Trade Funds show the entire picture of what is happening in the market. The only way out of this mess for the Obama Administration is to slash spending and cutting taxes. Our country simply can not handle its current debt load and obligations and we are headed for a dollar and debt crisis. Look at how the dollar is performing, UDN shows what is happening to our dollar. America can survive and work herself out of this jam but she needs to act now and swiftly.
Looking ahead we have the durable goods number out this morning and GDP numbers our tomorrow. If we can survive both of these numbers we can base in this market. I noted in this post that we are getting long in the tooth regarding this uptrends. It is quite possible we are simply resting and allowing stocks to setup in bases. Although our Treasury situation looks bleak it does not necessarily translate into total destruction of the stock market. Remember, we have red flags alerting us to lighten up on our positions, but that doesn’t mean to completely ignore potential setups.
From the get go stocks pushed higher following through from Friday’s late day surge in trading. Leading stocks took center stage as many of them surged higher on heavier volume showing institutional support. I am looking for this trend to continue with leading stocks. Up to this point we have seen junk off the bottom stocks lead this market from its lows. Since the March 12th follow through day we have yet to see leading stocks take center stage. Junk off the bottom stocks is not what you want when you are expecting an uptrend to continue. Quality growth stocks, those showing excellent growth in fundamentals is what is needed for a sustainable uptrend. I do believe we have the right ingredients in place for this market to continue its march higher.
Always remember to cut your losses short and your powder dry to take advantage of the opportunities the market is giving you.