Special Risk Capital Management LLC

Another Bizarre Week October 24, 2014

That makes it two in a row . . . I mean bizarre weeks in the market.  There are so many under currents going on that it’s hard to list them.  You’ve got weak European economies and fears of global slow down, elections in Brazil, Ebola, ISIS and then the host of (now) secondary issues worldwide.  The old saying that “a weak market does not act well to bad news, while a strong one sluffs it off”, comes to mind.  Third quarter earnings have been generally OK, but there have been surprises . . some companies actually missed earnings by a penny.  Wham, the stock losses 4-7% in hours.  Expectations were high and stocks were “priced to perfection”.  Something had to give.

People are on edge and markets don’t like uncertainty  However this week we reclaimed a good chunk of what was lost in the previous 2 weeks.  “Happy Days Are Here Again?”.  Maybe.  This V shaped bottom / correction is highly unusual; in stocks sometimes, but in the overall market (index), now that’s rare.  What concerned me most were a missing Bullish Wyckoff Bar Count.  (To involved to explain here.)  But typically I’ll see a Bullish bar count about the time Sentiment and Price trends break Bullish.  That bar count did finally break up today (Friday) at the close.  Since it counts Bullish and Bearish bars it obviously did not like this V bottom . . . . it’s much more accustom to some form of base building / price structure.  The next thing missing is a break above the last Wyckoff “Significant bar”.  That level is 4500 on the NASDAQ (the dashed purple line below).

I did “dip my toes” back into the water but ever so slightly.  I’ve just got this feeling that we’re not really headed back up in a straight line.  A close above 4500 would help calm my concerns.  BTW, click on the graphic to enlarge it for easier viewing; this is not intended to be an eye test.  🙂

I’ll also note on the chart above the positive turn in market sentiment (blue line) on Wednesday.  That’s important.  Most of my price trend indicators turned on Thursday and the “Money Flow” indicator (red histogram) is now modestly positive.  We’re close to 4500, so let’s see how early next week pans out.  Remember, scale in, no need to jump in with both feet.

The three pie charts below should give you an idea of the general market.  These charts are made up of the 1500 stocks in the S&P 1500 Index, so it’s a very broad indication.

The number of stocks in Accumulation (buying), Neutral and Distribution (selling) are nearly equal; about a 1/3 each.

As you can imagine, the Price Strength chart above favors the Bulls (green shading).  Most stocks are in a nice up trend in price.

Lastly I made a pie chart of strong stocks and noted what industry they are in.  (make sure to click on it to enlarge the chart)  The biggest “slice” is in Retail, then follow it around counterclockwise to Biotech/ Pharma, etc.  If you “need to be somewhere”, these are the “better place to be” generally.

Why this a V bottom?  Most likely short covering.  The mad scramble to buy back shares that were not owned, to close out a position.  It looks like that is about over though.  Next week should answer the question: “Does this rally have any staying power?”.  Be careful, there could be some surprises out there.  Have a good week.   ….  Tom   ….

bar chart by MetaStock; pie charts by http://www.HighGrowthStock.com; used with permission