Jul 03

Weekend Review and Watchlist

The tone for the market this week was set before it even opened, with last Sunday’s futures session at first indicating a 40-pt decline on the S&P. As the cash open approached that was reduced significantly and briefly continued in the first half hour, but as the session wore on it became a relentless grind lower, going out at session lows with a loss the Sunday night futures had accurately suggested.

For the rest of the holiday-shortened week the market managed to bounce, but it was of the dead-cat variety, over the course of three days not even managing to overcome Monday’s open.

For all the headlines and drama it created, where does that leave us?

We’re still just 2.5% off the highs of six weeks ago, and yet came within a few points of testing the 200-day MA in Monday’s decline. The big picture hasn’t changed – we’re rangebound – but underneath the surface there is some cause for concern.

One change I’ve noticed is when you look at the S&P via the $SPY, which more accurately reflects the level of the futures the instant it opens rather than the cash index which adjusts as each stock opens, you can see that regardless of whether it finished up or down from the previous close, it’s now had ten consecutive sessions where it closed lower than it opened. Bar one unchanged session, it’s the same for $QQQ.

More specifically, you can see that days that open higher get sold into, and days where it gaps lower continue lower and go out at session lows. This kind of price action is a classic sign of distribution.

Also of note, that behavior is even more pronounced in $RSP, which equal-weights the S&P, reflecting the fact small caps gave back some of their recent relative strength this week.


Let’s turn to the nine S&P Sector SPDRs to see the strongest and weakest areas of the market.

There’s a slight change at the top, with Consumer Discretionary ($XLY) moving ahead of Healthcare ($XLV) which finished below its 20EMA, followed by Financials ($XLF) which despite a valiant recovery attempt midweek, still closed below its 50-day.

(The third best sector being below its 50-day tells you just how thin the leadership is. More on that later.)

Then it’s Technology ($XLK) and Consumer Staples ($XLP) which broke their 200-day MA and barely recovered.


Beyond that it starts to get ugly.

WARNING – The following charts show price action which some readers may find disturbing.

Materials ($XLB) and Industrials ($XLI) look similar and show how limited the bounce from Monday’s mauling was.


There’s also a change at the bottom as Utilities ($XLU) managed to close up on the week and revisit the 20-EMA, which was enough to relegate Energy ($XLE) to last place, although I’ve found refiners which look good.


The weakness in the market certainly took its toll on our Alpha Capture portfolio which was -2.5% on the week vs -1.2% for the S&P. It’s now +10.4% YTD vs +0.9% for the S&P.

Having enjoyed a six-week run of consistent outperformance, this was our second straight week with a 2% decline. Monday’s market slump triggered four exits in $ETFC, $CRM, $AXTA, and $DOW, reducing our portfolio to only five names and over 50% in cash, remarkable considering the index was still just 3.4% off its highs.

That’s a result of the rangebound environment we’ve been in, where opportunities we’ve taken have had relatively close invalidation points, and those tighter stops in turn result in larger positions in terms of capital allocation and a more highly-concentrated portfolio. When the stops come all at once, it rapidly moves us to the sidelines, and in a fast headline-driven market environment, that’s a good position to be in.

If the market continues lower, the impact to our portfolio is diminished. If instead it bounces like the ‘V’ shaped lows seen in the last year, we have the cash on hand to deploy as the strongest names trigger new entry signals.

As the week progressed, those first signals came through. Several of our trade ideas that hadn’t made it into the portfolio, as there was no room when they first triggered, hit new highs this week and gave us a fresh entry signal. This time around the portfolio was able to easily accommodate them, bringing us back up to eight positions with 35% cash heading into next week.

We may even have additional signals for Monday, which I’ll confirm later this weekend.

Full analysis and commentary on current signals, as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is available here.

Clearly, as I’ve already shown, some significant damage has been done to the market overall, but we don’t need to trade a market view or predict what will happen. We’re just going to take whatever the market gives us, whether it’s more exits on continued weakness, or new entries on a recovery.

In last week’s watchlist I highlighted the increased strength in consumer discretionary names, and as we’ve already seen, that continued this week with $XLY being the only sector SPDR that remains above its 20EMA.

There are a couple of interesting sub-sectors showing strength in otherwise beaten-up areas of the market, such as Refiners within Energy, but other than that, I’m struggling to come up with as many quality setups compared to previous weeks.

Accordingly, as the leadership continues to thin out, our watchlist is down to just 20 names this week.

Here’s a small sample:-
















Full analysis and commentary on current signals, as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is available here.








Jun 27

Weekend Review and Watchlist

On the surface it was another dull week for the S&P 500, frustrating bulls and bears alike as it remained rangebound, but underneath the surface there are some interesting developments, and we had our fair share of action in individual names too.

The S&P looked as if it was ready to join the NASDAQ and Russell at fresh highs but didn’t quite make it, pulling back to end the week below its MA’s, but still above the higher lows from earlier in the month.


The Russell closed slightly lower on the week, in what looks like a simple retest of its breakout the previous week.


Putting the move in context for the S&P, we’re just 1.4% off the highs, with the 200-day MA slowly catching up.


@RyanDetrick highlighted earlier this week that the $SPX has now gone 9 straight weeks without a 1% weekly move, the longest streak in 22 years and the 5th longest of all-time.

That brings up the curious observation that currently if the S&P were to slump 50 points or so next week to test its 200-day MA, it would still only be 3.7% off its all time high.

I asked Ryan if he had any data on that and he’s already come back this morning with the result:-

If using the 200-day as your guide for the market is your thing, that’s certainly a conveniently tight stop-loss right there were the market to head much lower, but in most cases it appears even where these kind of tight ranges did elicit a test, many were in longer-term bull market environments where further gains were ultimately forthcoming.

Also of interest this week was this chart from @Hedgopia highlighting the continued increase in short interest.

This is hardly the behavior of complacent investors, and as we’ve seen from sentiment measures recently too, it’s not that there is an overwhelmingly consensus of bearishness, it’s the lack of outright bullishness that I find striking.

Where is the euphoria? In sentiment surveys the single largest group is those claiming to be ‘neutral’ and anecdotally I’d call the time-honored ‘cautiously optimistic’ a close second. From the above chart it could be concluded that even if we are to believe those that say they are bullish, how they are acting tells a different story.

All these factors continue to suggest an eventual resolution higher is still the more likely course, but either way, whatever transpires we’ll wait to see how it manifests itself through our individual names and respond accordingly.

Let’s look at some areas of the market that had an impact this week.

First the Transports. I’m not about to wade into Dow Theory here, other than to say it’s been misunderstood and maligned in recent months with some God-awful analysis by those without the letters ‘CMT’ after their name, but the Transports have been weak and weighing on the broader market for some time now.

There’s really no reason why you should still be holding onto anything that’s been acting like this. This is a weekly chart of the last 18 months, and there have been numerous opportunities to exit. The first was in early April with a break of the 40-week, and there were numerous indications in the weeks that followed that it was still in trouble when it failed to sustain any recovery, eventually confirmed with another major break and follow-through in late May. In subsequent weeks it continued to tread water, and this week was the lowest close since the October lows.

The other big move this week, and perhaps a bit more of a surprise, was in Semiconductors, shown here via $SMH which put in a lower low with a major break of its 50-day MA on increased volume.

I’m not a ‘buy the dip’ guy, and I’m wary of putting out charts that might imply ‘look, this happened twice before therefore it will do it again’. I would simply mention my way of processing these type of patterns is to not play them in either direction, but instead observe if there is any subsequent change in behavior. At this stage it’s observable information, not actionable information.

So what’s still good? Here’s a run-through of the nine S&P Sector SPDRs:-

Leading the pack, I can’t separate Healthcare ($XLV) and Consumer Disc ($XLY), followed by Financials ($XLF).


Next comes Technology ($XLK), hurt by the aforementioned weakness in Semis, and Consumer Staples ($XLP).


Then it’s Materials ($XLB) and Industrials ($XLI), which both broke and closed below their 200-day MA.


Finally, the ugly sisters Energy ($XLE) and Utilities ($XLU) who I’ve warned you about for weeks, and they continue to demonstrate why.


Navigating those cross-currents is never plain sailing, and while our Alpha Capture portfolio has done extremely well in this rangebound environment, this week it got hit -2.3% vs -0.4% for the S&P, to register its first weekly decline in seven weeks.

It’s now +13.2% YTD vs +2.1% for the S&P.

That loss was mostly attributable to the exposure in technology where we exited $AMBA for a healthy 62% gain after a stellar run, and by Friday’s close had an additional exit signal.

Full analysis and commentary on current signals, as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is available here.

Consumer names continue to dominate our watchlist, with a healthy dose of healthcare and financials also. In a slight change from the usual contribution from biotech, within healthcare the notable shift this week was the strength in healthcare services names, following the Supreme Court ruling on the Affordable Care Act.

Here’s a sample of 10 names from the full list of 30:-




















Full analysis and commentary on current signals, as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is available here.










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