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Watch Those Divergences, Mister!

|Includes: CHK, SPDR S&P 500 Trust ETF (SPY), UNG, XTO
Okay, so there has been little to write about - at least little new to write about - over the past few weeks. The market continues its exhaustive run, and perhaps we are now seeing that "capitulatory" push higher that we wrote about last week. There were too many bears out there pounding the table after every one-day reversal, at least for my taste, which meant there had to be at least one more inevitable squeeze. However, the divergences are starting to become more stark. Take a look at the SPY.

 

You do not need to be a market guru or technical wizard to rationalize that this recent push was fueled by a lot of scared and fidgety traders. Relative strength is not confirming new price highs. When no one has conviction in rising prices, it means traders are simply swapping shares back and forth to one another. Take a look at our longer-term picture. 
 


Same story. As the expanding range gets wider, there is more room for these squeezes higher (oh, and yes, more room down below). But are investors really making out in the squeeze? AAPL for example has traded in a tight 8-9 dollar price range (5% up or down). Other leading stocks are working on complicated topping patterns and/or consolidations on flagging strength. Given the complete lack of conviction on this last push in the S&P and other indices, I think it is safe to say we are seeing early warning signs of a potentially deeper/more vicious pullback ahead. As I wrote in the watch list last week, traders with an aggressive bent may even attempt to short this market in this vicinity (or 20 pts higher). 
 
Don Worden of Telecharts fame has, in his own commentary, started to invoke mention of the historical 1937 market correction. This is something that I personally find interesting, given that large-scale economic storms such as this one tend to NOT end with a simple, "happy time" V-shaped rally. It is said that 1937 wiped out more poor bastards than the original 1929 crash, simply because everyone had erroneously declared that the worst was over. While no one (including myself) can truthfully tell you where the markets will go with 100% certainty, I cannot help but feel that the fall from here has the potential to be, for lack of better words, ouch "smarts."
 
Shifting gears, I am starting to read more and more commentary about natural gas - that it's time to buy! I think most of these talking heads are fly-by-night traders, and as such I am not willing to jump on the bandwagon just yet. Too many players are trying to catch the falling knife for this to be "the bottom" for natural gas prices. The definition of a bottom is when no one wants to touch the thing, and would rather drink water through a pair of dirty gym socks than consider calling their broker. We may be close, but are we really there yet?
 
However, from a longer-term time perspective - for investors looking to add cheap, key commodities to their portfolios - I think it might be worth it to start tracking the commodity and paying attention to sentiment levels.
 
When it comes time to add some natural gas to your holdings, UNG might not be the best vehicle, as it tends to trade at a premium given its reliance and timing on contract cycles. However, unless you are willing to start buying the E&P stocks (which interestingly enough have not been falling with UNG, possibly clinging to oil strength instead of gas weakness), there might be few options for investors to take.
 
Divergences do exist to suggest that nat gas might hit bottom once sentiment turns firmly foul. As a contrarian I think it is important to move with the extreme here, given supply/demand dynamics and the general bottomless/limitless trading style of most commodities.
 
You knew you weren't going to get away without some charts, so here they are:

 

Both charts show the same picture. And while the stock charts of several E&P companies (such as CHK or XTO) have been basing nicely during this time, it may be worthwhile to wait for some confirmation or sign of life from the underlying commodity before vainly trying to play any relative strength there.