Sunday Recap

So is it time to begin panicking just yet…maybe? After a summer of snoozing through 13 weeks with an average 8 point advance, volatility hit the S&P 500 squarely in the solar plexus last week as we suffered through our first 1% day in what feels like forever. Everyone on the Street but the guy selling dirty water dogs took a beating, but isn’t that what the market is all about. Shaking out the weak hands and offering buying opportunities? What made last week so challenging for asset allocators of all stripes was that Thursday’s liquidity driven blowout hit every domestic equity sector. Your positions were going down regardless of how carefully you thought you had diversified and a quick look across the one week style box returns shows the carnage.

As you can see, the pain inflicted on small and midcaps in 2014 has finally spread to large caps as the trend of their recent outperformance seems to be coming to an end. Even sector rotation only helped to blunt the pain as the year’s best performers, reit’s and utilities, both lost ground as investors took some chips off the table.

But telecommunications looks to be coming back from near death as does the Far East on the internaSECtional side, but more on that later.

INT

The daily chart of SPY below shows that a divergence has been forming for a while with SPY continuing to move higher while its trailing 20 day Chaikin Money Flow score showed continued distribution.spy

And of my preferred risk proxies, the ratio of SPDR Barclays Capital High Yield Bond ETF to iShares Barclays 3-7 Year Treasury Bond etf or in stockcharts short hand, JNK:IEI (for more matched duration) has been flashing trouble since the start of the month, just as it did in January.jnkiei

How bad has the breadth gotten? Only 30% of S&P 500 stocks are above their 50 day MA while approximately 68% are hovering close to their 200 Day MA. A momentum tracking model I have been developing thanks to some great work done over at the Capital Spectator shows that short and long term momentum scores for SPY are close to levels not seen since late last January.

50R

200R

So far, everything I’ve said has been descriptive and I’m sure you’re wondering where the value-add is at in this blog so far. As I’ve said before, my goal here isn’t to generate trade ideas but to foster discussion. Mostly because:
A. I have no idea what your goals, means and financial objectives are
B. I could be totally wrong

But before you go rushing off to buy SPY, Ultra SPY or if you are our friends at Good Harbor, UWM, stop and think about the last week. Do you think the weak momentum and recent rout are enough of a pause to shake out a few players and now is the time to buy the dips or are you going to liquidate and buy some gold to bury in the back yard?

For those more tactically minded, before I’d get too eager to buy, I’d wait to see if the Chaikin Money Flow score begins to improve, preferably with a reading above .05. I’d also wait to see if JNK:IEI begins to stabilize and move higher while the SPY begins to find support. We bounced off a long-term uptrend line on Friday at 191.57 and there’s strong prior resistance just shy of 190 while the legs of the most recent uptrend line are back at 185.56. With plenty of support between 185-190, a nice bounce around here wouldn’t be unexpected as the pullback stops and allows investors to catch their breath.

Where are we going after a bounce? Well for those with a strategic outlook, on a weekly basis we’ve pulled back nearly to the uptrend line that has supported the 2012 advance, but that’s a topic for later this week. Buying pressure has definitely eased since June and no one ever got fired for deciding to trim their equity allocation after letting it ride. But that’s enough for today; come back later this week for a strategic flavoring.

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