What a week! It couldn’t have been permeated with more mixed signals and divergences. SPX made all time highs, while the rest of the market was taken to the woodshed. For a several weeks now I have been pointing out all the divergences and presenting a bearish tone to my posts. Anyone who followed me last year knows I was a HUGE bull so transitioning to the bear side over the last couple weeks has been challenging, but when in Rome…..
Let me start off by saying there was nothing bullish about what happened on Friday. This market is screaming that there is trouble ahead. Now I am not calling a top and I actually do not think we have reached “the top,” but I think that a correction (likely deeper than anything we have seen in in over a year) is looming. Having said that I wouldn’t start shorting everything on Monday as markets typically don’t go straight down and there will be bounces along the way. Furthermore, earning season begins next week and the street has lowered expectations among many companies recently. Therefore, we may see upside surprises that will separate the good from the bad. Some stocks will see new money flow while others will experience mass exodus.
Assessing The Damage:
- The SPX, which has been doing a fine job masking the damage being done in the rest of the market, is now below the 10-day MA and just a hair away from being below the 20-day MA. More significantly, we had a failed breakout finally confirming what the rest of the market has been signaling.
- The DJIA has also been masking the damage, but I am less concerned there and rightly or wrongly, don’t heed much attention to the DOW theory, which you can read about here).
- We are below the 10, 20, 50 and 100 day MA’s on the QQQ, which I deem a better indicator regarding the overall health of the market than the SPX.
- We are below the 10, 20, and 50 day MA’s on the IWM.
- The technology stocks that have been recently leading are old tech such as IBM, MSFT, and HPQ. That’s akin to me asking my grandmother for Tinder advice.
- Utilities XLU made an intra-week high not seen since June 2008.
- The consumer staples (XLP) have been underperforming the cyclicals (XLY) since early March.
- High beta discretionary, biotech’s, and social media stocks, typically representative of risk-on continued to be pummeled last week.
What The F%^$ is Going on Here?!?!
Without over complicating things, let’s take a look at what is likely going on. We have had a five year bull run that began in 2009. In the fifth year, last year, the market ended up over 30% on the year. Things got a tad bit stretched shall we say. They went too far too fast and when that happens within a trend (currently a bullish one), a period of consolidation takes place resulting in some mean reversion. I wrote about that at the start of the year here. Although the selling may appear excessive at times, when viewed from a broader perspective, it exhibits signs of a healthy market resetting itself. You can see this broader picture with the following monthly chart of SPX. 
So Now What?
Again, to simplify, the path of least resistance right now is down. Don’t over think it. Yes we will see bounces, especially when we get oversold, but until the path of least resistance turns back up, don’t use 2013’s playbook. This is no longer your 2013 BTFD market. This is your 2014 ‘failed breakout’ STFR market. Downside levels of support on SPX for next week are 1850, 1838, and 1825. Resistance on the upside is 1875 and 1897.
Not even close to being oversold on SPX based on 20-day lows. 
Getting close, but still not considered to be oversold on QQQ. 
Good luck next week. If your looking for guidance, consider a subscription.
What The F%^$ is Going on Here?!?!
What a week! It couldn’t have been permeated with more mixed signals and divergences. SPX made all time highs, while the rest of the market was taken to the woodshed. For a several weeks now I have been pointing out all the divergences and presenting a bearish tone to my posts. Anyone who followed me last year knows I was a HUGE bull so transitioning to the bear side over the last couple weeks has been challenging, but when in Rome…..
Let me start off by saying there was nothing bullish about what happened on Friday. This market is screaming that there is trouble ahead. Now I am not calling a top and I actually do not think we have reached “the top,” but I think that a correction (likely deeper than anything we have seen in in over a year) is looming. Having said that I wouldn’t start shorting everything on Monday as markets typically don’t go straight down and there will be bounces along the way. Furthermore, earning season begins next week and the street has lowered expectations among many companies recently. Therefore, we may see upside surprises that will separate the good from the bad. Some stocks will see new money flow while others will experience mass exodus.
Assessing The Damage:
What The F%^$ is Going on Here?!?!
Without over complicating things, let’s take a look at what is likely going on. We have had a five year bull run that began in 2009. In the fifth year, last year, the market ended up over 30% on the year. Things got a tad bit stretched shall we say. They went too far too fast and when that happens within a trend (currently a bullish one), a period of consolidation takes place resulting in some mean reversion. I wrote about that at the start of the year here. Although the selling may appear excessive at times, when viewed from a broader perspective, it exhibits signs of a healthy market resetting itself. You can see this broader picture with the following monthly chart of SPX.
So Now What?
Again, to simplify, the path of least resistance right now is down. Don’t over think it. Yes we will see bounces, especially when we get oversold, but until the path of least resistance turns back up, don’t use 2013’s playbook. This is no longer your 2013 BTFD market. This is your 2014 ‘failed breakout’ STFR market. Downside levels of support on SPX for next week are 1850, 1838, and 1825. Resistance on the upside is 1875 and 1897.
Not even close to being oversold on SPX based on 20-day lows.
Getting close, but still not considered to be oversold on QQQ. 
Good luck next week. If your looking for guidance, consider a subscription.
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