That is the question I find myself asking these days.
Momentum is certainly to the upside as the uptrend is firmly intact but there are troubling aspects of the market that concern me. Chiefly, distribution.
There are more distribution days adding up in the S&P and the rest of the stock market. Yesterday, was a general distribution day that affected all segments of the market as well as the leadership.
As I have written here, when things have been too good for too long (such as the momentum run the market’s been on since bottoming in March) the Contrarian starts to come out in me and this is one of those times.
Distribution is spotted in the market, such as the S&P index which I weigh heavily in my analysis, when price action declines or stalls on higher than normal volume. Distribution days that add up to around 5 or 6 distribution days within a 5 to 6 week period tell you that the market is in danger of declining.
Why?
Because price and volume have a unique relationship. By that I mean that price/volume are like boyfriends/girlfriends or husband/wife. The other’s moods tend to influence their partner. If my wife is having a bad day it usually means that I am going to end up having a bad day and vice versa.
So, with price under distribution its only going to be a matter of time before the overal market begins to tank. How bad? Don’t know but I do know I will be looking for short-term shorting plays with options unless their is broad technical breakdown and then I will switch to an intermediate- to long-term Bear.
The Big Question is how do you play this in the meanwhile? Tops in the market are notoriously hard to call so I would continue to play this to the upside but smaller and shorter price targets. Look for breakouts as well as buy on the pullbacks when available.
As a broad oberservation, these are dark times economically and in the geopolitical sense. I am not a pollyana nor am I a doomsayer but more of an realist with an upbeat attitude. American power, at least in the short-term, is on the wane and stumbling under enormous debt. While, as an American, it pains me to say this I am comforted that I believe it only to be temporary but frustrated that all of these bailouts are adding to our debt while not accomplishing very much.
The burst of momentum in the stock market was in large part due to the necessary and unfortunate layoff of so many people. Business owners will often tell you that payroll is one of the biggest if not the biggest expenses they have. Now, the current employees are working more to accomplish the same pace as they did with more staff while earnings are up to due to a savings in payroll. I have long wondered when that cost savings benefit would run it’s course in the market and we may be seeing that reflected today with all the distribution taking place.
The good news is that as long as our politicians fight amongst themselves with all the issues at hand particularly healthcare, they will be less likely to meddle in the private sector. Only good can come of this as private businesses emerge stronger as long as government meddling doesn’t cause another dip back into recession (let’s keep our fingers crossed).
As a side note, I have been reading more and more about the loss of American leadership in the global and economic arenas with some calling the US a declining power or a “Paper Tiger”. At first, considering the present government in power, I think that would be a fair criticism at first blush. But, the US government is not the American people and is usually comprised of Life’s underachievers and not indicative to the will and potential of the people they claim to represent. Indeed, all the criticism from around the globe brings out the Contrarian in me again that serves to indicate that America will arise stronger than ever as she always does.
Our friends in Europe share a similar tale and, in some ways, have a bigger burden to carry but I am confident that each nation will emerge a vibrant and powerful country as they always were. Many Americans accuse Europeans as being rather high on themselves and proud (isn’t that ironic?) but for those of us who have been to the many countries in Europe realize that Europeans have alot to be proud of.
Where lacking the miliatry dominance of the US it is apparent that Europe has tremendous “Soft Power” of a united EU that can dicate terms economically and diplomatically provided they have the will to do it. The challenge for Europe in its current state is to coordinate and take into account all the competing interests that make up the European Union. That is no small task to say the least.
Till next time, trade smart and use stops as these are interesting times.
Good Trading,
Billy
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