Tuesday, August 19, 2014

Market At New Highs BUT Major Red Flags Persist

The major indices continue their seemingly unabated charge to new and all time highs despite threatening to fall into a correction multiple time over the last few months. But, all the red flags present near the last few attempted tops, still persist today. 

There has been little accumulation since the market bottomed in early August with most rally days coming in diminishing volume. Complacency seems to be settling back in despite a lot of uncertainty around geopolitical events, intra-day volatility is high, the NASDAQ advance decline line is unable to come off the lows even though the Nasdaq is leading into new highs, and the small cap, Russell 2000 and SP 600, and mid cap, SP 400, appear to be setting up a second leg down. About the only good news is the lack of distribution since the below average volume follow through on August 13th, but that can change very quickly in this environment.

Leading growth stocks as a whole continue to under perform the market and fail to follow through on breakouts. The handful that have followed through are well extended from low risk entry points and appear to be climaxing or running out of steam (volume diminishing). The rest are mired in wide and loose consolidations unable to breakout despite the market rally over the last two weeks. Baidu (BIDU), Facebook (FB), Under Armour (UA), Polaris Industries (PII), and Chipotle Mexican Grill (CMG) have stalled after gapping up in strong volume on earnings, Bitauto (BITA) reversed in heavy volume from what appears to be a climax run, JD.com (JD) attempted to breakout in heavy volume only to reverse to close near the lows of the day and below the breakout point, and Jumei International (JMEI), a recent Chinese IPO, gapped and closed down over 10% after reporting strong earnings. Not the type of action expected out of leading growth stocks during a strong rally. About the only good news here, growth stocks have out performed value stocks during this rally, but that is little consolation with so few making progress.

This appears to be another one of those short lived rallies the market has served up over the course of the last few months, in which making much portfolio progress is extremely difficult. Investors and traders have had to be fast to book profits and minimize losses, or they found themselves quickly under water with most trades building little to no cushion. With all the red flags, traders should once again tighten stops to protect profits and minimize losses. Few positions are worth holding past a few days/weeks if they've made no progress, especially if they are under water. Better to be under invested in this environment, then over exposed.
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