While we saw some higher prices today, there are some disconcerting technicals associated with it. Volume was higher on the NASDAQ, but barely. We also saw lows expand, mostly in consumer sectors. Lastly, our intermediate timer lost ground also. As prices were higher and stocks accumulating outpaced stocks declining, we saw weakness form in the indices. I will be watching new lows closely to see if they continue to expand, as well as our intermediate term timer (which has done quite well to keep us in the rally until now).
As you can see, volatility is starting to expand in the markets. As we pointed out a few days ago, tops often form over time and with increased volatility. Earlier we saw contraction and so a top was less likely, however, now we are starting to see it expand. This with the fact that the market is late in a rally tells me the risk below is greater than the reward above, and whenever that occurs, I pullback. We must remember that conserving money when risk is high may miss out of gains over the next day or so, but will be net profitable over the long run.
The NYSE Summation Index is an extremely helpful indicator to help with market timing. The exact calculation is somewhat complex, but it is a derivative the of the advance/decline line. As you can see, when it turns flat or negative, it often signals and end to the uptrend. The NYSI (NYSE Summation Index) participated in Leg 1 of the rally, but not Leg 2. We are seeing this last leg up on air almost and harder to believe. With increases volatility and volume over the last week or so, we may be seeing some distribution. Sector Analysis
We see that new lows grew in Discretionary and Staples, both consumer driven sectors. If the consumer continues to grow weaker, then the market may have problems. The current GDP and even market pricing has been largely driven off of the consumer as of late. This will be a trend we will have to watch. On the other hand, Energy is continuining its strong push. We have seen this developing and have had plenty of time to get in. This is why daily watching of the sectors is important, you can see strength and weakness much earlier than normal.
Computer based industries seem to be the strongest recently. From suppliers to distributors, this particular area of technology has been consistently making new highs. Auto also has been strong. This is why I added $MPAA to the momentum list and saw 10% in two-day from it. Sector strength helps security relative strength. We also see more Oil and Gas strength proven here as well. Keep an eye on new industries for ideas of where to look for new stocks. Equity Analysis With accumulation outpacing distribution by quite a bit, there was some strength in the market. However, often when "strength" comes in this late in a rally it is exhaustion rather than strength. Industries being accumulated the most were Oil and Gas as well as Industrial Metals. This supports the sector rotation we have seen. With inflation creeping in, energy gaining strength, and commodities going up, this may be a theme we can invest alongside for an intermediate to longer term edge. While we saw the consumer based sectors are weak, the specific area is apparel. This industry was under the heaviest distribution today. Action in the leaders was mixed today but mostly up. $VSEA, a semiconductor company, was up 5.47% for the day. A bit of a surprise (considering the weakness of the industry) was $DV. Up over 4% and showing leadership characteristics, this stock has been bucking the trend. Other stocks to note were $EBIX up 1.24%, and $PAY down 1.79%
Overall, the trend is up, and I don't fight that, but risk is high. I will keep cash at 50 or greater, positions size from 1/4 to 1/2 normal sizing, and keep stops tighter than normal. However, no shorts will be initiated as of yet since I don't like picking tops. Please be aware that there is a different in my writing. Being aware of possible times for tops vs calling tops and trading them are two different things. When risk for a top is high, I simply lower my risk taking activities, but when at top has formed, I trade with the new direction, short.