The 50 day moving average is a closely watched barometer of market health.
There is nothing magical about the 50 -- or any other moving average, for that matter -- other than broad popularity (which fulfills aspects of self-fulfilling importance) and the 50 EMA's utility as a decent statistical proxy for bullish/bearish transitions.
In a Global Macro Notes from October 15, we noted the two major indices -- Dow and S&P-- would have to hold the "Maginot Line" of their respective 50 day EMAs. They did that, which was market-positive, even managing to surge off the line, thanks to uber-bullish housing starts. But what macro data giveth, macro data taketh away…
And thus, Thursday's ugly jobless claims, coupled with trouble in the house of Google and growing fears of a crappy earnings season jammed up against a 'fiscal cliff', led the Dow and S&P and Transports to sharply decline, right back to 50 support again.
When you head right back to the support level you just left, it ain't a good sign… this action has left a nasty gravestone doji on the S&P and Dow weekly charts.
(A gravestone doji is a long candle upmove, completely retraced, to close on or near starting lows -- perhaps termed gravestone because you see them when optimism dies…)
Worse still, technology -- via Powershares QQQ (NASDAQ:QQQ) -- and small caps -- via iShares Russell 2000 (NYSEARCA:IWM) -- are both well below their respective 50s now, with no support respite in sight.
The dollar and Treasuries -- two usual harbingers of "risk off" sentiment -- were relatively subdued in Friday's "Crash Anniversary" sell-off. (Friday was the 25th anniversary of the 1987 market crash, for those with restricted access to the outside world.)
But crushing that piece of good news was swift decline in previously strong areas of the market, fueling the increased likelihood of new downtrends.
Take biotech for example -- via iShares Nasdaq Bitotechnology (NASDAQ:IBB). As the IBB chart shows, biotech is witnessing violent "broken trend" action of the sort that is hard to ignore.
When fundamental conditions are favorable, or at least receptive to "wall of worry" buying, investors can ignore shallow market pullbacks and even see them as buying opportunities. (This is one reason the 50 is so popular… fundamental bulls can use it as a comfort zone line in the sand.)
There are limits, however, to the extend of decline this "buy the dips" mentality can withstand. When the decline turns from a "dip" into a vicious drop, acid reflux starts to kick in.
Friday's extreme drop in iPath Copper (NYSEARCA:JJC) was somewhat ominous as well. Known as "the metal with a PhD in economics," we have long discounted Doc Copper's prescriptions due to the smallness of the market (relative to global capital flows) and the serious games being played in China.
Still, though, the games played in copper usually have a bullish tilt. Chinese authorities have a vested interest in seeing copper stay strong, as there are so many leveraged reveal estate obligations tracing back to dodgy shadow banking uses of warehoused copper as illegal collateral.
And on top of that, we are supposed to be in a housing market recovery, with home builders storming the heights and new construction on the upswing.
Said in Eddie Murphy yiddish rabbi voice: "With THIS backdrop, copper falls? Oy!"
Two bright spots in last week's carnage were energy and utilities. While the Energy Select SPDR (NYSEARCA:XLE) and Utilities Select (NYSEARCA:XLU) still registered declines in Friday's carnage, 1) relative strength was excellent, and 2) bullish patterns remain intact for both, which is saying a lot in comparison to so many now "broken" trends.
In the Mercenary portfolios, we now have two large bets on -- one bullish and the other bearish.
On the bullish side, we maintain our aggressively long energy footing, which was highlighted in previous notes.
On the bearish side, we put on substantial size (4x normal position) shorts in tech and transports, via QQQ and iShares Dow Jones Transportation (NYSEARCA:IYT), triggered roughly on Friday's market open.
The questions now are, where to from here, and when to bag profits?
We like short technology at this point, as the move could have legs. The internals of Google's earnings miss were bad, bad, bad. 'Twas as if Google (NASDAQ:GOOG) were a shiny, juicy looking apple, revealed to have a worm inside.
And speaking of "apples," the most widely owned and beloved stock in the history of Wall Street (NASDAQ:AAPL) could continue to fall under the weight of its own perpetual selling, a self-fulfilling prophecy of profit taking and risk reduction begetting more of the same, if no turnaround catalyst materializes.
Amusing side note: We tried to use Apple Maps in Las Vegas this week to give us walking directions to Yellowtail, a sushi restaurant in the Bellagio. Of course, the damn thing sent us in the wrong direction…
Thus far, earnings season is starting to feel like a bad Ashton Kutcher movie titled, "Dude, Where's my Revenue?"
Even with the endless asshattery that is Europe taking a hiatus -- and for how long, one wonders -- you just have a whole bunch of bad juju either sitting on the horizon or getting baked into the cake here and now:
Bellwether IBM's poor showing (which reflects poorly on global government spending)… weakness from additional bellwethers GE, MCD, CAT… top line whiffage left and right… the "fiscal cliff" freaking out corporate bosses… whispers of trade war… the post-stimulus law of diminishing returns… Republicans' stated intent to fire Bernanke (and presumably replace him with a hawk)… the Middle East mess and its threat to escalate (Syria, Iran etc.)…
At the end of the day, we continue to focus on price action, a habit that has served us in good stead.