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Recovery, But . . . July 2, 2016

Posted by Tom in Thoughts.
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July 1, 2016 – Before we start, just a reminder:  the date leading off the commentary is the “data date’, that is the last date of the data that the comments are based on (typically a Friday at the close).  Also, to enlarge the graphics for easy viewing, just click on them.

This week was a recovery from the “BREXIT Selloff” and we’re just about back to before the vote.  The first thing that comes to mind is how nervous this market is; anything can trigger a steep sell off.  On a price earnings basis the market is at the high end of valuation plus it’s been a while since we had a major correction.  In short, many folks are anticipating a significant sell off but buying the dips is still in vogue.

From a market structure stand point where do we stand?  Looking at the chart below I’ve labeled the current up swing as a possible LPSY (Last Point of Supply).  It is tentative because (theoretically) price should not over shoot the UTAD level at roughly 4905, and we’re very close to that now.

NASDAQ

I should point out that I’ve changed the chart.  I’ve deleted the “accumulation & distribution volume” indicator in preference to a new “Volume Flow” indicator.  This indicator is dimensionless so the thing to observe is how it changes direction.  The 20 day simple moving average (red line) helps in that regard.  Indicator (black line) above the red is “bullish”, below the red line is “bearish”; much easier to follow.  Thus the volume has recovered, but has not recovered its “bullish” position due to the heavy selling during the swing down.  Market Sentiment is Neutral.

Friday was a light day due to the 4th of July holiday approaching, so volume and price were muted.  A typical LPSY bar would have a low spread and average to above average volume (indicating selling into a rising price).  Friday does not fit that due to the very low volume.  So . . . we may have to wait until Tuesday, due to Monday being a U.S. holiday.  But here’s the good part:  Monday will be an open market in Asia & Europe, plus we’ll see price action on Monday night / morning on those exchanges too.  Those two sessions could give us a “heads up” on what to expect on Tuesday morning.

One last point of concern.  While it is true that many of the beaten down sectors have recovered last week, but defensive sectors have also done very well.  Money is flowing into (U.S.) bonds, precious metals, utilities, real estate and telecom.  That’s not what you’d expect during a roaring recovery in small cap and technology stocks.  Money is looking for safety as well.  Just something to keep in the back of our minds.

Here’s a look the short term price strength of stocks in the broad S&P 1500 index.

Price Strength

This rightfully shows strength, so no real surprises here.  The bottom line is Yes recovery, but we may not be “out of the woods” just yet.  Early next week should provide us with some evidence one way or the other.  Have a good week.   …..  Tom  …..

price chart by MetaStock; pie chart by http://www.HighGrowthStock.com.  Used with permission.

 

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