Special Risk Capital Management LLC

Climbing The “Wall of Worry” August 23, 2014

This market is waaay overbought.  That is, it has gone up too far, too fast and is “suppose to” go back down (at least a little).  It has defied the Soothsayers and Analysts.  After all . . Summer just has to be a weak season.  Roll out the mid-term election statistics and every other seasonal study going back to the 1800’s.  This wasn’t suppose to happen (remember “Sell in May and Go Away”?).  It was once said that “the market is designed to make the most people wrong, most of the time”.  And so it goes.

Looking at the chart above we see a solid break above the Trading Range; very Bullish.  Money is flowing into the market.  What continues to bother me is the below average volume (circled).  Wyckoff Theory really doesn’t want to see advances on high volume (supply coming into the market).  Wyckoffians much prefer to see advancing prices on (near) average volume.  A nice orderly advance if you will.  But for the past week we’ve seen narrow range bars on very low volume.  Now Wyckoff teaches that stocks can advance on low volume, that’s possible and OK, but it may also point to a condition called “Lack of Demand”.  In the case of No Demand any increase in price is short lived and destine for a sharp move down.  It is the basis of a UTAD (Up Thrust After Distribution).

Since (IMHO) we don’t have a good Distribution Structure, a UTAD (if it forms) would likely lead to a brief and shallow correction.  I can see that possibility in the chart above.  Narrow bars, low volume: supply & demand nearly equal with low supply of shares.  The Summer Doldrums?  Perhaps, but if one is not “in the market” now, it is poor timing to get in now.  I’ve started to lighten up  a little on sluggish stocks.  Time to “thin the heard”.

While I’m not out and out Bearish, I am very Cautious here.  Danger signs would be a wide spread down bar (close at / near the low) on high (above average) volume.  Distribution confirmed.  So . . stay the course but dance next to the exit door.  It may come in handy.

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

chart by MetaStock; used with permission