5 reasons that point to a selloff
As I do at the end of each month, here is a run
down of some of the things I’m seeing in the market…
Positive
Foreign Markets — Foreign markets have generally
remained in good shape. Japan, India, and Russia are a few of the leaders.
Unfortunately, their strength hasn’t carried over to the U.S.
Negative
Accumulation/Distribution — The price and volume
action over the last few weeks has been bad. The market has risen on light
volume and declined on heavy volume. This is an indication of institutional
distribution. On top of this, notice the number of black (or red) candlesticks
on a chart of the
(
SPY |
Quote |
Chart |
News |
PowerRating) or
(
QQQQ |
Quote |
Chart |
News |
PowerRating) over the last month. Since 11/25, the
SPY is only down a little over 1%. Yet during that time, there have been twice
as many black candles as white candles. Institutions have been gapping the
market up in the morning so that they can sell it off during the day. The big
boys are unloading stock on the unsuspecting public while artificially propping
up the market. This kind of action is many times seen near tops.
My shrinking watch list — While some new stocks
have been making it through my scans and setting up in basing formations, there
have been a larger number that have seen there bases fall apart. This is a
negative as it signals that there are not a significant number of stocks that
are prepared to lead a new rally.
New Highs vs. New Lows — Breadth has been lousy.
The rally that began in October was unable to generate significant breadth
numbers and the last few weeks have done nothing to help this. The market has
remained afloat thanks to a few large caps. This is evidenced by the
underperformance of the Nasdaq and the Russell 2000 versus the S&P 500.
Incidentally, the performance of all indices has historically been better when
the Nasdaq leads the S&P.
UUWNHI (Unofficial, Unscientific, Working / Not
working Hanna Indicator) — The biggest focus here is the fact that breakouts
have gone nowhere. Breakdowns on the whole haven’t fared a lot better, as the
market has been drifting more than trending. This means there is no leadership.
It also means breakouts are not generating any real excitement. In a strong
intermediate-term trading environment it is not unusual to see numerous stocks
move up 10%-20% within a few days of breaking out. This just isn’t happening.
The rewards aren’t there. Therefore, the risks probably aren’t worth taking.
Should the market head lower as I suspect it will, then I believe the most
opportunities will come from big picture topping patterns, rather than
breakdowns — at least in the early stages of the decline.
Sentiment — Several measures of sentiment are
just too bullish right now. We may need a bit of a market correction to
alleviate this condition.
Summary
The market looks very toppy. Bad breadth, poor
follow-through, distributive action, and overly bullish sentiment are all
pointing towards a selloff. I would be surprised if it began in earnest before
2006, but I believe we will hit a rough patch in January. The market has been in
neutral for nearly two years now and the upcoming selloff could be just the
medicine it needs to launch the next leg higher. Not to get too much ahead of
myself, but I believe the upcoming rough patch will prove to be just that, a
rough patch. Once through it, I expect the market will rally strongly in 2006
and good traders will enjoy the ride. More on that next week…
Have a wonderful New Year!
Rob
For those who may be
looking to expand their knowledge beyond just market timing, my
Hanna ETF Money Flow System utilizes the VIX in
generating trading signals for spread trades.
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.