Tuesday, June 10, 2014

Shortage of Sellers Explains Rally

Today was no different from any other day since the market starting rallying in May. A few frightening intra-day shakeouts reversed to close at the highs of the day. The DOW, SP 500, NYSE, and now the even the Nasdaq and Russell 2000, are within striking distance of new fifty two week highs. Price action of the indices has been positive and the NYSE advance decline line is confirming the strong price action by leading into new high ground. Unfortunately, below average trading volume is a major concern. It indicates that the rally is a result of a lack of sellers, rather then real buying.













Leading growth stocks have had a few good days here and there, but overall display major weaknesses. Most growth stocks remain unable to breakout or rally from below or off their moving averages, new consolidations are late stage or wild and loose with volume drying up as the stocks have attempted to rally to pivot points, and breakouts have failed to follow through, lack volume, or lag significantly. The handful of stocks that managed to follow through, come from groups and sectors considered value type safe havens because of their dividend yields...energy, healthcare, utilities, REITS, etc.

Based on the VIX and bull/bear ratio, traders and investors are extremely complacent. The VIX is at rally and eight year lows, and the bull/bear ratio is near the widest spread of the entire bull market.













This rally is like every other short rally we've had in the past year and a half. The market turns suddenly higher after a string of poor headlines, and proceeds higher almost unabated for a few weeks, only offering a few hours during intra-day shakeouts to initiate positions. But this time it is different. Volume has failed to confirm the indices strong price action, consolidations are later stage bases and wilder and looser, breakouts have failed to follow through significantly, lack volume, and/or relative strength, and investors and traders are extremely complacent...few calls for a pullback or correction. Trader's don't need to rush to cash, but with little profit cushion since the rally began, gains can turn to losses in one bad day. Review and tighten stops to protect profits and prevent major losses.

The exact timing of a correction is hard to predict, but with so many active warning signs, it wouldn't be surprising if the market started getting distributed once the Nasdaq and Russell 2000 join the remaining indices at new highs...the optimal area to trap the bulls and squeeze the shorts. The good news, the new highs by the NYSE advance decline line indicates that a major bear market is not in the cards, but a major correction that feels like the start of a bear market could be.
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