From a weekly perspective not much has happened as we closed basically unchanged on the week for the $SPX. Markets continued to largely ignore the mayhem that is occurring in the world with thousands of people being killed weekly now in Syria, Iraq, Ukraine, Gaza, etc. and economic growth sending very mixed messages most of which point to continued challenges. Argentina is about to default, Brazil’s growth is shrinking drastically, Germany is signaling a slow down and numbers in the US with missed PMI and home sales are not exactly shining brightly while retail sales continue to drag along slowly with consumers even staying away from summer movies. PMIs beat in China and Europe so at least products are being produced, whether they will be all sold in time remains to be seen.

None of this backdrop stopped new highs from being made in the $SPX and the Nasdaq. Buy, buy, buy continues as money desperate for yield keeps chasing and chasing and chasing. “There is no alternative” and “Money on the sidelines must come so we should buy before they do” are some of the most common rationalizations given for buying equities. And when that doesn’t work they say that P/Es are not maxed out yet. Right, never mind that the “E” is purely conjecture based on projections which may or may not work out. Tell that to buyers of $AMZN who had a certain “E” in mind before Thursday’s bombshell.

The illusion of growth is still well kept up by the ZIRP financed buyback game and so the chase continues. Yet one can’t win a war if fewer and fewer soldiers are showing up to do battle. The weakening internals are becoming more and more pronounced and looking under the hood it is increasingly becoming clear that a few generals in large cap land are keeping the indexes up while more cracks are appearing in this historic bull’s facade.

On Thursday over 69,000 calls were traded on the $SPY $200 strike indicating how bullish everyone was lined up. I had pointed out divergences this week with a rising $VXX and weakening internals and an emerging bear flag in the $RUT and our trade strategy was to short the strength into Friday. One of the only reliable sell indicators as of late has been the emergence of black candles near highs inviting at least a day or two of selling and Thursday’s black candle did not disappoint:

Note also the negative divergence on the High/Low ratio versus the previous highs at the beginning if July. These negative divergences are becoming hard to ignore and while the $NDX managed another break-out to new highs this week it was a break-out to sell and not to buy as these negative divergences finally caught up with the hard charging tech sector:

While $AAPL and $MSFT had issues in their earnings reports the real weakness came from semi conductors which got hammered as reflected in the $SOXX coming off hard:

Note it closed below its 50MA an area which has marked general support over the past year. The MACD is looking ghastly and with QE ending in October and earnings disappointing what’s the catalyst here to go higher? Hunt for yield? Buybacks? Knock your SOXX off.

Other issues emerging: The $DJIA has failed to make new highs and dropped below its June highs piercing a trend line going back to the February lows:

Small caps continue to show weakness and make lower highs and must avoid a drop below the weekly 50MA or potentially face a repeat of 2011:

Even the $VIX showed a little life and per my musings on the $VXX its pattern shows a potential move higher. Note that the recent break-out from its declining channel seems to have been confirmed:

But it’s the $VIX weekly chart that really hones in on the fact that the $VIX is way overdue for a major spike:

I know people seem to have forgotten that downside is possible and the continued march to new higher prices certainly gives license to succumbing to this illusion of tranquility:

But it is an illusion as people are confusing price with value and price which continues to be a function of cash not knowing where to go but chasing into the same asset classes but, as the charts above show, into fewer and fewer stocks.

Next week we have another Fed meeting where Janet Yellen will undoubtedly tell us in usual form that she will be accommodative forever as a capitalist free market economy simply cannot do without a central bank constantly intervening. Following Janet it’s then off to month end mark-ups. More chasing to do.

From my perch the increase in volatility is a good thing as the up and down action provides great opportunities to catch quick moves. As I pointed out this week knowing your levels and the ever changing trend lines are key tools to help set-up nice trades.  If you want to join us for daily analysis and set-ups you’re certainly welcome to do so via the sign-up page.

Good luck trading!