Special Risk Capital Management LLC

Continued Moves Up, But . . . February 18, 2012

OK, I’ve been expecting (tho not predicting) a market correction for the last 2 weeks.  Why?  Because the market is (way) over bought.  That is, a steady stream of up bars (daily movement) without any significant down move or pause.  While this is “good”, it’s not typical.

Right now we see prices continuing to move higher but note that the momentum, or rate of upward movement, is slowing.  That does not mean “bad things” are around the corner, but it does indicate that one should be more cautious with current positions or buying into this market right now.  What draws my attention to the “narrow range bar” on Friday.  (Narrow range means that the spread between the high and low price of the day is less than normal).  A narrow range bar, especially with high volume, can be a short-term indicator of selling pressure = buying pressure and perhaps a climax of the run.  The trouble is the volume on Friday was not that high but more normal.  So no confirmation yet.  (Friday being option expiration can be a factor as well, as traders “square up” positions at expiration.)

We look at market internals

The graph above is the price strength of stocks in the S&P 1500 index.  “Green is Good” and we see a lot of it here.  In the intermediate term prices are strong, in an upward trend.  Fair enough.

The graph above shows the strength of Accumulation and Distribution of those shares of stock.  It is a function of both Price and Volume.  Again, “Green is Good”. 

charts courtesy of www.highgrowthinvestor.com; used with permission, copyright 2010-12.

So what’s to be concerned about?  Nothing except this market is vulnerable.  it can’t continue to increase at this rate (+83% per year) for very long.  It is susceptible to bad news from just about anywhere.  So the word is stay invested but be cautious.  When (not if) a correction comes, how much volume (distribution) flows out of stocks will be a key as to how far it corrects.  Right now I don’t see a major down draft but only a healthy minor correction; but we’ll see as it unfolds.

What’s doing well?  Technology, Japan, Small Cap., Internet, Consumer Services, Retail and Semiconductors.  Latin America is start to spring forward as is Thailand.

Note: I’ll be out of the office next weekend, so there will be not report unless a major item breaks, then I’ll try to post a short message.  Otherwise we’ll see ‘ya in 2 weeks.   Take Care & Be Watchful.   …… Tom  …….