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Looking For A Modest Pullback August 20, 2022

Posted by Tom in Thoughts.
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August 19, 2022 –  I’ve been expecting to see a modest pullback from the recent market rally for a couple of weeks, the question was ‘When’ would it start.  Well we got our answer late this week with what I think is that correction from an ‘overbought’ condition.  The S&P 500 Index has touched the declining 200 day moving average and that could have ‘spooked’ investors as prices have gone up rather quickly from the late June low.  Time for a pause to refresh.

click on chart to enlarge

This ebb and flow, back and forth of prices is to be expected especially when everyone is on “the same side of the boat”.  So while this may cause some concern, it is really ‘normal’.  Now, where will this go?  I’m initially thinking around the 12093 level on the NASDAQ Composite Index; that would be a ‘natural’ place to stop.  At that point we’ll have to see what volume has come in on down bars (selling), so far rather light, and what volume is coming in on up bars (buying).  Also is there an appetite for risk?  The small cap index (Russell 2000 / IWM) will give us an idea if folks are bailing out or seeing this as a buying opportunity.

This past week we’ve seen core and defensive sectors rise to the top and more aggressive sectors (technologies, pharma & biotech) fall off; less risk.  The Short Term Sector table shows this below:

Let’s see how this pullback develops as next week unfolds.  Many traders are on vacation in the Hamptons so volume is typically light which means it’s easier to move price, but price and volume remain as significant clues as to direction.  I’m still thinking that the “low is in” for this trend swing in the market, but that does not preclude a correction somewhere in between now and the previous low.

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

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.

Due For A Pull Back August 13, 2022

Posted by Tom in Thoughts.
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August 12, 2022 – This was a good week for the stock market . . . a steady march higher.  My momentum / statistical indicators show that it is likely to pull back shortly.  I feel that it will either be a short pull back then resumption higher (in green) or a pull back and the start of a consolidation pattern (in orange).  In either case it sure is looking like the bottom is in, well, at least for now (the next couple of months).

click on chart to enlarge

Our task now is to identify where to put investable funds, especially if that pull back happens soon.  That’s where “Top Down Analysis” comes in.  First determine the overall market Trend, then identify what Sectors are leading that Trend.  Next what stocks in those sectors are the strongest.  Scaling into positions is recommended; no need to jump into the deep end all at once.  The Short Term Sector Strength table below gives us the information for the second step.

Overall we’re seeing some insider buying of their shares, the % of stocks above their 50 moving average is Bullish and Small Cap stocks are strong.  With Technology strong and Financials gaining that appears to be “Risk On” mode.   It’s been a busy week for me and I’ve still got a lot to do, so this will be a short posting, but the three steps that I outlined are important and deserve some careful thought by investors. 

Have a good week.       ……….  Tom  ………..     Comments are always welcome.

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.

Anticipation August 7, 2022

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August 5, 2022 – A good week for the market, but let’s take a step back to catch our breath.  And speaking about market breath (yes, a play on words) last week was very positive.  Whether you look at the number of stocks above their 50 day moving averages or up / down volume things were looking pretty darn good.  The advance was broad, across large to small cap stocks, and deep, just about everything participated.  But (and there’s always a ‘but’), the Fed is still going to raise interest rates and inflation for now is still present.  Is the market anticipating good things happening in the next 6 months, because it always looks ahead, or were we just ‘oversold’ and due for a snap back rally?

click on chart to enlarge

I’ve drawn in roughly two scenarios in green and red on the chart above.  The green is the optimistic route.  The low is in and interest rates will increase but not by much with inflation slowing.  The red route is a less optimistic view with things improving at a slower rate, with perhaps one more trip lower.  I’m thinking that the low for the year maybe ‘in’ but we can expect volatility so that a steady rise will not be ‘in the cards’.  What is the strategy right now?  I favor a “scale in” approach where we put money to work an increment at a time and place it in areas / sectors that are leading the way.  It’s still a time to be cautious and selective.

Looking at the Short Term Sector Strength table below –

Seeing Technology based sectors at the top of the list provides us with a number of opportunities to invest in market leading companies.  One step at a time, this likely will not be a straight line to a new top.  What could mess this up?  Well, next week we continue with earnings reports and new CPI (Consumer Price Index) data comes out Wednesday morning.  Any of these could spook the market and a pullback would be typical.   Let’s watch the volume on down bars for clues as to whether the selling is minor or indeed profit taking after a strong rally.

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

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.

Was That ‘The’ Bottom ? July 30, 2022

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July 29, 2022 – The question on the mind of many is: “Was that the bottom?”  I’ll get right to it with a definitive ‘Maybe’.  I’ll list the Pro’s and Con’s so you can decide:

The Bottom Is In

  • Prices made it up through the 50 day moving average.
  • The Advance / Decline line has improved quite a lot.
  • Small Cap stocks are showing strength & moving higher.
  • Many indexes have bottomed out at their 200 day moving average.
  • Bond interest rates have actually come down over the past weeks.
  • The FED “appears” to be more “dovish” (leaning toward less increases).

The Bottom Is Not In

  • The recently rally was due to short positions being covered / bought back.
  • Volume on Up bars is modest at best; not a surge of buying (yet).
  • New High vs. New Lows is just OK, not showing strength.
  • Prices are now at a resistance point back to the previous highs in early June.
  • Volume on Friday’s big move was pretty darn anemic.

So now what?  I’m expecting a pull back early next week.  The amount of that pullback and the volume that it creates should be an indication of the strength of this market.  I found it curious that oil / energy and consumer discretionary sectors were doing very well last Friday.  Not exactly what you’d expect to see if an economy was going into a recessionary period.  Short covering or is somebody getting very optimistic early? 

click on chart to enlarge

Right now I’d say what we are seeing is a ‘Tradable Bottom’ within a Bear market, which means that a retest of the lows is likely.  I could be wrong, but I’ll wait for a firm(er) confirmation on my daily chart.

The Short Term Sector table is below –

Let’s keep an eye on the price action next week.  If things are truly strong any dip will be bought and we may have an improved price structure to work with for the rest of the year.  But right now, I’m not totally convinced.   Have a good week.        ………  Tom  ………

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.

In Range, Building a Base July 23, 2022

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July 22, 2022 –  OK we had a good week but there is still work to be done before we can confidently say that the low is in and we’re in an uptrend.  On the chart we can see that we’ve broken above near-term resistance but remain within my called-out trading range.

click on char to enlarge

Many short term indicators are positive but I note that volume during the last couple of days was low; no major commitment by traders just yet.  I’m seeing the hedge levels (Put options) dropping but that leads me to think that these short term up ticks are mostly driven by short covering to reduce the Put / Hedge exposure.  We need to see some follow through if this is in fact a change in trend.

Next Wednesday is the next FED announcement date.  And ALL eyes will be watching at about 2pm on Wednesday.  From what we’ve seen lately the initial move switches back quickly in the opposite direction; it pays to wait and see how the entire market reacts.  I am seeing some improvements in “Market Breath”, that is, the amount of volume during Up bars vs. Down bars.  There is still a bunch of down volume over the past month to “absorb” with buying but it is a start. Note: major earnings are being reported next week.

Remember that the stock market anticipates the economy and reacts to where the consensus thinks it is headed, not where it is now.  To that end the U of M Consumer Confidence chart shows that the market typically bottoms out as the consumer is the most negative on the economy.  That doesn’t mean that the market can’t go lower, but it shows that it may (just may) be getting closer to a bottom.

The Short Term Sector Strength table is shown below –

Semiconductors and Technology lead the market higher last week and much of that was news related, so let’s see if that strength can continue into next week.  Right now I’m Cash heavy with exposure in select Biotech stocks and I’m waiting for a better market indication before I phase into the market.  As I mentioned last week, the Treasury Bond auction went well and that’s a potential sign . . . but then again there is the FED and interest rates.  Are we done yet?  (not likely, IMHO)

Have a good week.   ……..  Tom  ………

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.

Market Volatility: A Day Trader’s Dream July 16, 2022

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July 15, 2022 – This market decline has turned into a day trader’s dream, they thrive on volatility in both directions.  Witness what we saw on Wednesday morning (below, a 4 day 30 minute bar chart).

From the market open on Tuesday down to the low on Wednesday, back up to the close on Friday was a “round trip” of over 30 points on the SPY (S&P 500 ETF).  That move (if perfectly timed) would be worth $15,000 with one e-mini futures contract and $75,000 on a full sized futures contract.  Now I’m definitely NOT an advocate for day trading, but my purpose is to bring forward just how volatile this market can be, especially around major economic announcements.  For position traders and investors, volatility signals caution.  When moves quickly appear in the market, they can easily disappear, and quickly too.  My last point is that these types of moves feed on themselves.  i.e “Buying begets buying, & selling begets selling.”  The futures and options markets do move the stock markets as the writers of these contracts react to lower their risk by buying/selling the underlining stocks.  There is a lot of portfolio hedging using leverage contracts out there right now.  Hence, volatility as people scramble to adjust exposure on the fly.  We’ll see more of that as “the big guys & gals” cover their short positions (hedges) driving the markets up . . . for awhile . . .  then . . .   Our task is to evaluate and respond to investment trends, not short term volatility.  I’ll feel a lot better when I see the amount of Put contracts decrease.

One other point to bring up is the 30 year Treasury Bond auction this week.  With the FED raising interest rates one would think that the prices would be going down (interest rates rising), but . . .  that did not happen.  The auction was quite successful.  There was demand for the US bonds and prices went up (buyers willing to accept a low interest rate).  Why would anyone want to tie up money for 30 years at this low interest rate?  Two ideas:

  1. Investors assume that the FED has reached a near term peak of increasing rates.
  2. Major concern about the world economies; a flight to safety.

As the old saying goes, in times of economic stress, “investors are more concerned about the return of their money more than the return on their money”.  The rise of the US dollar compared to the world currencies does not help these concerns either.  It makes US exports more expensive, thus a strain on the US economy.  And it really throws a “monkey wrench” into the world markets.  The US$ is now worth more that the European Euro and that’s very unusual indeed; not a stabilizing factor.

These are interesting times.  There are some signs of a market trying to at least find a base.  The question is: is this a sign of the re-accumulation of shares or just a pause below another down leg.  Watch the volume on up bars (& down) for clues, especially on market stalwarts.  Are investors buying or selling?

The Short Term Sector Strength table is shown below-

Have a good week, but be careful out there.   …………  Tom  …………….

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.

A Good Week June 25, 2022

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June 24, 2022 –  Last week was a good week for the stock market with some hopeful signs beginning to show.  The markets are oversold so that nice bounce on Friday was somewhat expected.  What is interesting was the very high volume on Friday.  This was likely caused but “short squeezes”, that is people who were short stocks and then having to buy them back to cover their short positions (to avoid losses); a.k.a. “buying begets buying”.  But another factor is there remains billions of dollars in Put options and some of them expired on Friday.  The question is: did these contracts “roll forward” (in time) or did they cover/close?  Lastly, we are approaching the end of the quarter and many funds will begin to rebalance their portfolios per their charters.  We’ll have a better idea on Monday.

click on chart to enlarge

There has been extreme investor pessimism and there are very early signs that the Technology and growth stocks are beginning to at least stabilize. I still favor a possible bottoming and basing formation over the next 6-8 weeks.  That process could be a positive if strength returns, or . . . if economies don’t show some improvements, a set up for another leg down that would be a flushing out and capitulation phase.  That basing area could be between 12290 at the top and 10560 at the bottom (NASDAQ Composite Index).

The Short Term Sector Strength table shows what a difference a week makes.  Energy at the bottom and select Technology sectors moving toward the top.  Note the strength in Chinese stocks.

The bottom line is really no change, we continue to be in a Bear market but we must also be open to that will eventually change.  The question is when, and it will likely take time over months.  I’m watching for a base and “stopping action” to form.   Have a good week.      …………  Tom  ……….

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.

OK . . . What Next? June 18, 2022

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June 17, 2022 –  Interest rates are going up (no surprise) and will continue to go up (again, no surprise).  The question is how much and how fast, but really the bigger question is whether it will lead into a recession and just how deep and long it could be.  Oh yes . . . inflation is a major factor.

In general, a news item typically causes a minor short term effect on the stock market.  What REALLY concerns investors is a recession, because that has a major effect on profits, hence earnings.  Over the long run, it’s really all about earnings and the future growth of earnings.  Stock prices just reflect the “future hopes” (i.e. bets) of investors.  I’m NOT predicting, but I do like to anticipate possible market structural scenarios.  The idea is not to act on them now, but to be open to the possibility of movements so when they begin to unfold (or don’t) one can react quickly.  So, here we go:

click to enlarge chart

The Green lines represent a bounce up from where we are about now going way back to late September, 2020 (note the red arrow; this is a weekly chart).  The idea is that this level is a logical support level and then we spend the next 6 weeks or so in a trading range (then possibly another leg down).

The Red lines represent a continued move lower, perhaps much lower.  Sure, there will be small bounces, but the trend would be continued weakness for the foreseeable future.

The good news is that we shouldn’t have to wait much longer to find out.  I note that billions of dollars of Put hedges expired on Friday, and since the prices did not fall (indicating option exercising) they appear to have been rolled forward (i.e. close out the June contract and open a July one).  Why do we care?  Because the big investment houses are continuing to hedge, thus “buying insurance” in case the market falls further.  The big guys are cautious, I am too.

The Short Term Sector table is below:

China is showing some life and potential but much of the top sectors are defensive.  Note that Energy has dropped down; is it short term weakness?  That’s it for now.  Have a good week, looks like this will be lasting for a while, no V bottoms this time.        ……….  Tom  ………..

Price chart by MetaStock; & table by http://www.HighGrowthStock.com. Used with permission.

Back To Reality June 11, 2022

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June 10, 2022 – At the beginning of this week it appeared that a bottom might be in and a strong rally was underway, but . . . inflation data came out, retailers were reporting that their inventories were up 30 to 40%, consumer confidence continued to be low and (of course) gas prices crept even higher.  That was it, two days of big drops.  I was thinking that we were in-line for a pullback because of the low volume (a.k.a. low commitment) at the higher price levels and besides, nothing has materially changed either.

click on chart to enlarge

So what’s next?  I’m thing lower prices early in the week, then a recovery.  The strength of that recovery will be telling. But since the FED is meeting next week, and will put out a news release on Wednesday afternoon, not much will happen until late in the week.  The market is expecting two more (at least) ½% increases this year.  How Powell phrases ANY activity after the meeting will be an important factor on how the market reacts with anticipation.  Does he sound dovish or hawkish and to what degree, that is the question.  Then we need to evaluate how the market reacts and just how committed it appears.  Is volume increasing?  Is everything being affected or only a handful of sectors?  The bottom line is: Is this market ready to rally?

Looking at the Short Term Sector Strength table below we see the Energy complex and China showing the most strength.

I’ve added a small China position to my Energy & general commodities holdings but still have Cash to deploy IF & When that’s appropriate.  And when it’s time to take a position, scale into it.  Nobody gives you “extra points” for jumping in with both feet.   Have a good week.      ……………  Tom  ………….

Price chart by MetaStock; & table by http://www.HighGrowthStock.com. Used with permission.

Showing Life, but Not Commitment June 4, 2022

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June 3, 2022 – Interesting week, this past week.  In the media I’ve heard: “The bottom is in, time to back up the truck” and then, “An economic hurricane is coming, get prepared.”  Well . . . OK, looks like we’ve got two extreme predictions and the winner is: “Nobody really knows for sure.”  The saying “Even a broken clock is right twice a day” comes to mind.  Let’s look at the chart.

click on chart to enlarge it

What do I see?  I see a market that has many indicators positive and Bullish . . . but two things:  1. Look at the volume last week.  Very low.  You may say it was a holiday week, but in reality big trading firms have a staff on duty every week, regardless of vacations (they rotate throughout the summer) so there is always a trained staff manning the desks; they can’t afford not to.  2.  What has changed?  I mean has the Ukrainian war changed?  Has the economic outlook changed (inflation, interest rates, etc.)?  No and No.

What I’m getting at is let’s see IF the resent rally is anything to get happy about.  Low volume = low commitment; period.  Thanks but I’ll wait for at least some confirmation of a genuine rally before I get excited.  Let’s see what the sector table indicates.

I see the Energy sectors showing continued strength and maybe China is coming out of a funk, but that’s it.  No leadership from Technology or Finance or Consumer sectors.  Not a great vote of confidence.  Unless you’re day trading or in very short term trades, this remains an unfriendly market.  That could change, but not yet.  IMHO.

I remain in Energy and select Commodities, with a bit of Value exposure, plus Cash for the time being.  That could change, but I need to see more.  Have a good week.   ………….  Tom  …………

Price chart by MetaStock;  table by http://www.HighGrowthStock.com. Used with permission.

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