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Still Within Range, with Early Signs May 16, 2014

Posted by Tom in Thoughts.
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It’s been a busy week for me with more than normal e-mails to respond to, plus discussions with others.  Next week will be similar with a bi-monthly meeting with other advisors who gather from the tri-state area.  It’s always interesting to hear what’s on other advisors minds.  So I’m a little “tuckered out”, but let’s get right to it.

In the chart below we continue to observe the NASDAQ in a trading range (dashed blue lines).  This oscillation is great for short term traders but not very productive for most of us who are trend traders.

NASDAQ

It’s like Deja Vu all over again.  🙂   There is debate over “the cause” of this (lower bond yields, Ukraine, slow economy, etc.) but the actual cause is immaterial.  Personally, I don’t care what the cause is, I only care how the market is reacting to whatever it is.  So the immediate forecast is likely more of the same, but I am starting to see some indications of a break upwards.  I have a indicator which combines 5 major market breath data and it is just now starting to show early signs of initial buying of stock.  Now . .  .  this could change, as most indicators do, but at least it is a change and a (possible) positive one.  What is now necessary is a Sign of Strength (SOS in Wyckoff terms), and that may come only after a Spring lower to flush out the last of the sellers.  I’m watching for a short term (1-2 day) thrust down at or below 3990 on light volume.  Another scenario would be just an old fashion wide bar up on very heavy volume (buying).  With an index, that could happen.

The next chart is a Relative Strength chart from http://www.stockcharts.com.  I started it (zero % point) back in November, 2012.  That’s my unofficial start of this up trend and where my trend channel begins.  The chart compares the Russell 2000 Small cap index (blue line) to the S&P 500 large cap index (red line).  It’s very easy to see that the Russell out performed the S&P 500 right up to March of this year.  At that point investors changed.  The Russell went down (red arrow) and the S&P inched up (green arrow).  Since March, growth stocks have been out of favor.

Relative Strength

The question is:  is this an ominous indicator of investors shunning risk (more speculative growth stocks) in favor of large capital (presumed “safer”) stocks?  In other words, preferring “value” to “growth”?  If that is the case then one could expect a significant market correction, and that could well happen.  The other idea is that growth stocks have had such a marvelous run over nearly a year and a half that they have gotten ahead of themselves.  I’m thinking the latter.

I see no coincidence that growth stocks sold off just before announcing 1st quarter earnings.  Now earnings were generally not bad, it’s just that folks have grown accustom to 30 to 40% growth rates and throttling down to 20% just looks bad.  These rates make the high P/E (price earnings) ratio look expensive.  So . . time to wait and allow the price to reflect the current forward thoughts.  What the growth stocks need is some new products and innovation to spur investors back.  That has yet to be seen, and it maybe the Fall until we see it.

Have a good week.   ……………  Tom  …………………..

charts by MetaStock and http://www.stockcharts.com; used with permission.  click on chart to enlarge

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