Thursday, March 13, 2014

Second Major Distribution Day Confirms Market Correction

Wednesday, the market put on an uninspiring performance, selling off early in heavy volume, only to rally back in very low volume. Leading growth stocks lagged all day even as the market pushed higher to close around unchanged. Making the action suspicious.

Thursday's action confirmed that suspicion. The market rallied early in low volume, only to roll over in increasing volume and close significantly lower, down over 1% in heavier volume, despite strong economic news. Marking another major distribution day for the week and confirming the correction.

There is no positive, short term news for leading growth stocks. They sold off in heavier volume, few longer term setups exist, the few short term setups that materialized have been bull traps leading to losses, none are following through to new highs, and they lag almost daily except for a few speculative names.

On the other hand, short setups continue to follow through and break down, but keep a tight leash on stop losses and profits. The gains will be made very quickly, but the squeezes can take them away even quicker, especially this close to recent highs.

The news is not all grim. If recent history is any guide, this correction could be short lived. The NYSE A/D line led this rally into new highs, and bear markets do not typically start with the A/D line leading into new highs. The line will typically lag for several months before a top. But that does not mean a major correction, that feels like the beginning of a bear market is not a strong possibility.

The market and leading growth stocks are still in tack, technically and fundamentally, and could withstand a major correction, which lasts on average, two to three months, and can correct over 20% in a rumor or news driven panic.

There are plenty of flash points, the Russian Ukrainian Crisis, the Syrian Middle East Crisis, and the FED's decision and statement next week on March 19th. Do they stay the course or continue to hint at possible pausing? How much does an escalation of the Russian Ukrainian Crisis factor in?

Even if things worsen, there are few signs that a full blown bear is upon us, but a major correction, is highly probable. If the Russian Ukrainian Crisis boils over and/or the FED tightens their language, the market's initial reaction will be extremely bearish. But the market could fall in love with the idea that the FED might just pause the tapering, and even reverse course to stem economic damage if the Russian Ukrainian Crisis escalates, especially militarily. But that is just speculation. In any case, there is little to do on the long side. For now, cash or short are the best positions in this environment. Good Luck!!

Recently discussed, Dean Foods (DF) and Cirrus Logic (CRUS) continue their short setups and are within range of breaking down.

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