The Following is an excerpt from a FindLeadingStocks.com Intra-Week Update
Market In Early Stages of Forming A Large Top; Still Needs To Be Confirmed
The Market Is Getting Weaker, Not Stronger…
The market is in the early stages of forming a large topping pattern. The top needs to be confirmed by more than one major average breaking below support. We noted in early reports that a “normal” pullback this year has been about 5% which would bring the S&P 500 down to 1918. So, although this appears to be another ugly, the sky is falling, sell off- it may, in hindsight (if the bulls show up as they have done every other time the market has pulled back in recent years), might not be that big of a deal. The difference here is that this bull is getting “older/weaker.”
Path of Least Resistance Is DOWN
Suffice it to say we are still in “pullback” mode for now- which means the path of least resistance in the short term is down. Eventually these shallow pullbacks will get deeper. We want you to be prepared for when that does happen. As you can see from our approach, we “stopped” buying stocks a few weeks ago and that was a great call. Then we slowly trimmed our open holdings, again letting the market guide our hand. At this point, our stops are in (we are protected from any further downside action) and are doing our best to give our leaders the bullish benefit of the doubt. In case this turns into another shallow pullback. Furthermore, we are about to enter earnings season and want to see how the market responds. Of course if, at anytime, you are not comfortable with your holdings, move to cash. Remember, there is nothing wrong with being 100% in cash, cash is a position.
Russell 2000 Forming A Large 8-Month Top
Since February 2014, we have written several times about the bifurcated conditions occurring beneath the surface in the stock market. The basic notion is that the small-cap Russell 2000 was woefully under-performing the large indexes as this bull market crossed the 5 year mark. We said one of two scenarios will occur: either
- The market continues to rally and this is a short term phenomenon or
- This negative divergence will drag the market lower.
So far, the latter scenario is unfolding. It is normal to see small cap stocks “lead” the market up and down. From 2009-2014 the small caps “lead” the market higher (stronger % gain) and are now “leading” the market lower. At this point, the short term outlook has changed from “up” to “sideways” and will change to “down” if/when the Russell 2000 breaks and closes below support of its large 8-month large topping pattern (1082). As of this writing (Thursday morning), not surprisingly, this week’s low was 1083 – or 1 point above support of its large 8-month topping pattern (flat base). See annotated chart.
Russell 2000: Forming Large 8-Month Top
The Day Something Changed; Defense is King
The bearish stars are growing as the market, and leading stocks, continue to get hit. As of yesterday’s close, the S&P 500 has only had 2 up days in the past 10, not a healthy sign. Over the last few weeks we noted that September 15, was the day “something” changed. We saw a slew of leaders get hit in heavy volume and “stopped going up.” That was not healthy. A few days later the market briefly tried to rally but that was short-lived as the bears showed up and sent stocks lower. The market remains sloppy up here and defense is king until further notice. Another important tool is to study how “leading stocks” perform during bull markets. Eventually, all stocks top out and fall. When several leading stocks top out, it usually serves as a great tell that the broader trend may be changing for the market. We will have more on this in future reports.
Market’s Biggest Problem
For weeks, we have written that market’s biggest problem is (virtually no one is talking about it right now), is what will happen when QE 3 ends? Remember, when QE 1 ended, the S&P 500 fell -17%, when QE 2 ended it fell -22%. What will happen when QE 3 ends? The reality is no one, not even the Fed, knows the answer to this question… The “good” news is that Central Banks have said the easy money train is here to stay and if conditions worsen, they have made it clear that they have no problem providing more “liquidity” (e.g. QE 4, anyone?), If needed. It will be very interesting to see how this plays out. We want to see where the market closes tomorrow and will have a full report for you this weekend.