If The Rhetoric Bogs You Down, Go Back To Basics. Here’s How…
The best news I have seen in
days came through the market’s action on Tuesday! The major
averages all got hit, but volume came in lighter than Friday.
Unfortunately, that is not much solace after the Dow has
now given back 400 of its 500-point January rally. We are sitting on
three
distribution days for the Dow and S&P 500 and two for the Nasdaq. There has
been tons of talk of the averages being unable to hold their 200-day averages and
now they are all slicing their 50-day average like butter.
This fact coupled with the lack of breakouts could very
well mean that we are headed lower, but it is important to follow proven rules
in making this interpretation. Many times I get bogged down by all of the
rhetoric out there: VIX, sentiment, Put/Call, lack of breakouts, war, the
economy, interest rates, etc. When this happens, I do what I am suggesting
right now: step back and get back to the basics.
Start with the overall market. We are in a confirmed
rally from the follow-through day on Jan. 6 until we see
further distribution. So far, despite all of the negativity, we are still
missing one final distribution day that would make four in 10 trading days. I
would also allow five distribution days within 15 trading days. From this
perspective, it is still all right to buy stocks.
The next step presents the problem and the solution all
in one! This market has been unable to lure us in. Very few stocks have gone
through their pivot points (resistance), and fewer have succeeded. eBay
remains the single leader of this market. This is a scary thought considering
it re-tested its pivot point of 70.95 multiple times before making a meager
7% move higher.
So the problem becomes the solution when there are no
stocks to buy. With that in mind, we are forced to await better
opportunities.
While this market wades through its correction, keep an
eye on the leading groups. Today, transportation, trucking and services, along
with Fiber Optic Networks all suffered some of the day’s biggest losses. It
will be interesting to see if these groups can recover, or if money rotates
out of them as it has been doing over the past few months.
I will be back with my thoughts on Thursday in reaction
to what the market does over the next two days. If we see further
distribution, I intend to share some of the ETFs that may lead a decline.