Stocks continued recent weakness Monday as the S&P 500 fell 1.08% and the NASDAQ 1.16%. This pushed the S&P 500 into the red for the year. Things looked much brighter a week ago at this time but please note how we highlighted a weird situation where the utility stocks (which are safety stocks) were rallying at the same time as some high growth areas such as industrials and technology.
We mentioned Friday that it was important to note the change in the NASDAQ pattern. We have said repeatedly the past year as rally after rally started right after the NASDAQ broke the lower trend line for a few days that eventually this obvious pattern would break. But no one knew when eventually would be. Well Friday was “eventually”. For the first time after breaking the lower trendline in the index chart we did not see a V shaped rally to take the NASDAQ back near or to the upper trendline. So it is very important to note these changes. The failure of said rally has now led to a follow through day to the downside so the caution was warranted.
Usually we post the NYSE McClellan Oscillator but since we have seen such a divergence between the NASDAQ and S&P 500 we will post the NASDAQ McClellan Oscillator to show we are now deeply oversold.
After falling through the fall on Yellen’s “nice words” early last week, we’ve seen a spike in volatility.
Let’s take a look at some charts from Dan Zanger’s weekend newsletter. (Will not reflect today’s prices) Please note he uses a different ETF for the biotech stocks (a levered ETF) than we do, but same idea of very bad action for 3 weeks. There have been momentum stock breakdowns all over the place which he notes, just as we have.
And here is his view on the S&P 500 – a false breakout. Now this sometimes leads to brutal reversals and sometimes it doesn’t lead to much but you have to be consistent in your approach. Either respect all of them and raise cash when they happen or respect none of them and open yourself up to the times they manifest in much larger selloffs.