The tech weakness is principally resulting from an ever widening gap between a few well performing stocks and a very sizable undercurrent of extreme weakness. Yesterday Bloomberg reported that 47% of Nasdaq stocks are in a bear market having corrected more than 20%. The Russell has experienced similar drubbing with 40% of components in a similar boat. And so you get charts like these:
So that’s frustrating as the macro analysis is playing out in front of our eyes but indexes are barely reacting. In fact, knowing that this weakness is happening underneath it is stunning to see how well the $RUT, for example, is actually holding up:
In many ways it is already replaying 2011, but continues to cling to its monthly 5EMA. Yesterday we brook below, but bounced off of the 200MA and the lower daily Bollinger band. Last ditch hurrah before the big fall?
As one who sees the market as an overvalued beast with lots of downside risk I do have to take a close view of the other side of the argument. If so many stocks are so far down, but indices are not, what happens if these bounce from oversold conditions? Oversold? How can we be oversold we are barely down from the highs?
The answer lies in the $NYMO which clocked in a -62 reading yesterday. That is comparable to recent decline lows. And while the $NASI has finally registered a sell signal accompanying low $NYMO figures tend to actually produce a bounce first before moving lower (see green circles):
In addition, while we see weakness in tech and small caps select sectors are holding in very well, hence we did not see much movement on the $DJIA or $SPX. Financials for example stayed above the 5 EMA here:
Which brings me back to the larger $SPX structure we have been observing: Breakouts are initially fake as well and result in further weakness. The big reminder is the January correction that looked much like the current bull flag only to resolve lower fast after retesting highs:
Notice in addition to the $NYMO the high/low readings are also commensurate with recent lows, including the February low. These are frankly factors that make me suspicious of the short trade. Yes my trading psychology has probably been impacted by these never ending V rallies as well, but the fact that we are approaching this week’s FOMC meeting with oversold market readings is a major red flag. When is the last time shorting that set-up has worked? Exactly.
This does not mean we can’t head lower today into tomorrow, there is clearly selling pressure in the market. But one can smell the proverbial rat here. My ideal scenario then is a large bounce into previous highs to work off the oversold conditions and then a repeat of the January/February structure for a visit to the 100/200MAs which would be a sweet trade.
So you can see the signals are very conflicting and as the market has shown yesterday it can be quite maddening trying to figure out direction here. Hence I’m playing it very light in terms of commitment and fairly tight with stops. Unfortunately this implies that there may be false starts in getting the positioning right as we are waiting for the market to reveal its ultimate direction.
I continue to approach today from the buy side (large POMO today as well) with the intent to sell any strength into Thursday/Friday.