Two Market Positives, Two Neutrals — And Four Negatives

thought with the end of the month,

and the middle of the summer
upon us, I would spend my time today
discussing what I’m seeing in the market. We are currently in a consolidation
phase for the markets. The S&P and Dow haven’t made a new high since mid-June.
The Nasdaq has been consolidating for about 2 ½ weeks after hitting new highs
earlier this month. Overall, the market has experienced choppy, sideways action
for the better part of two months now. So how will this consolidation resolve
itself, and how should traders be positioning themselves to best take advantage
of the eventual break of the trading range? To try and answer these questions,
lets look at several factors:


  1. Economic stimulus — While the
    economic picture is not entirely clear, there is significant fiscal and
    monetary stimulus at work right now.  Tax cuts and rate cuts are designed to
    stimulate the economy, and should be a positive for the market in the months
    to come.

  2. UUWNHI (Unofficial,
    Unscientific, Working/Not Working Hanna Indicator) — Long-side breakouts are
    still working.  Some recent examples would include Taser International (TASR),
    LCA-Vision (LCAV), and Presstek (PRST).  I’m not seeing nearly as positive
    results from the short side of the market.  This indicates there is still some
    strength for the bull case.  (Incidentally, the UUWNHI also tells me that
    swing trading has been difficult.  This is due to the choppy action we have
    seen.  I don’t think it is necessarily a positive or negative indicator of the
    market, though.)

Neutral For

  1. New Highs vs. New Lows —
    While Mark Boucher’s new high’s list has been somewhat subdued as compared to
    the March-June run-up, the new lows list has been consistently very short. 
    While this would indicate a slightly bullish bias, I don’t believe this is
    showing us overwhelming evidence in either direction.

  2. VIX — While a VIX reading
    around 20 is certainly not a positive, it closed today only slightly below its
    10-day moving average.  If this gets stretched to the downside it could create
    a problem for the market.  Currently, I don’t believe it is a big problem.


  1. Intraday Action — The market
    has more often been finishing near its lows than near its highs.  While not a
    huge concern, a healthy market will more often finish the day strong.

  2. Sentiment indicators —
    They’re all still overly bullish.  Still being the key word here, as this has
    been the case for quite some time.

  3. Distribution — We have seen
    several distribution days now in the S&P 500, and some are beginning to crop
    up in the Nasdaq, as well.  This is a definite concern, as institutions seem
    to be selling, although not heavily up to this point.

  4. My shrinking Watch List —
    This is a big problem, as far as I’m concerned.  The sideways consolidation we
    have seen in the market over the last month and a half should have allowed
    high quality stocks a good amount of time to set up in solid bases.  I’m not
    seeing that happen, though.  My “watch list” is the list of stocks I
    follow that 1) I consider good enough fundamentally to buy, and 2) have
    completed a basing pattern and just need to break out.  The number of stocks
    in my list is significantly lower now than it was a month and a half ago when
    the market consolidation began.  I don’t see an abundance of quality stocks
    that could act as leaders right now if the indices were to break out.  Most of
    the stocks that have led since March are either extended or have begun to roll
    over.  Very few have formed the type of flag formation you would like to see
    prior to a fresh leg up.  I would doubt the March to present leaders would be
    able to lead the market again, and without new leadership emerging, any
    attempted breakout and move higher may be short-lived.

So while the small number of
breakouts I am seeing have had a reasonable success rate, they seem to be more
rare these days.  I believe the market is going to have to spend some additional
time consolidating if it is going to be able to break the trading range to the
upside and follow through in a meaningful way.  This will allow more stocks a
chance to set up before the breakout occurs, and increases the likelihood that
some quality leadership could emerge.  The support levels I’ve been outlining
remain important, as any break below the 960 number for the S&P could spell

In an environment such as this, I believe patience becomes very important.  Only
the best trade opportunities should be taken.  Don’t let profits you may have
made from March to now get chopped up. Capital preservation in uncertain
environments is key.  Time should be devoted to finding potential trade
candidates on both the long and the short side. As I’ve said before, I believe
the longer this consolidation lasts the more violent the ensuing move will
be. Be ready no matter which way it finally breaks and your hard work and
preparation should pay off.

Good weekend and good trading,

Rob Hanna