Monday, September 24, 2012

Stock Market Rally Intact But Warning Bells Growing Louder

For the first time since the stock market followed through on its current rally, theLeading Stocks Analysis is signaling that a major pullback or correction is on the horizon.  The analysis does signal anywhere from a few days to approximately 4 weeks in advance, so it is not an automatic sell signal, but it is a major cautionary signal and should not be ignored.

This has been a frustrating but profitable rally.  The first two months were extremely difficult to handle and the last month and a half has seen the early breakouts (first two months) follow through while most new breakouts stalled or failed.  If you were not in early, you have been frustrated and knocked around.

Generally a month and a half into a stock market follow through, leadership should be expanding and new leadership should be developing.  Unfortunately,  leadership has been narrowing since almost the follow through day and even recent action has seen most breakouts fail or stall.  Even Shorter term trading setups have failed to follow through longer then a few minutes to a day.

The narrow leadership that continues to run is now extended not only from their initial pivot points, but from any secondary add or initiation points.  Based on history, many leaders are also too extended from their moving averages to make much more progress without some kind of multi-week consolidation.

Essentially, Apple (AAPL) & Google (GOOG) have led and dragged this stock market rally higher even as the rest of the leadership has stalled or broken down.  GOOG is clearly becoming over extended and surpassing our short term price targets, while AAPL still has some room to run.

Any new leadership that is developing show signs of wide and loose trading action, deep erratic corrections, and an inability to follow through on any attempted breakout.

Up to just a few days ago, leading stocks had under performed the general markets on almost a daily basis.  The last four days have seen an out performance in leading stocks, which is likely due to month and year end window dressing by institutions.  This is not sustainable buying and likely to reverse once month end positions are accumulated.

These warning bells are not an all out signal to sell everything and move to cash, but it is a sign that over extended stocks and lagging positions should be sold, or stops significantly tightened, and margin reduced.  There is no reason to stay over exposed to non performing positions & a stock market in which leadership is narrowing quickly and what in hindsight will be called stalling action.

While we do believe that over the next one or two weeks the market and remaining leadership have some more upside, we know from past experience that it only takes a few days, in the wrong positions, to ruin the profits of a rally.  The over extended and lagging positions fall so fast, that most get caught up like deer in headlights.  Don't be a deer, better be a little cautious and take some off the table, then run over.
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