Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
We are in a very similar spot to February where safety sectors have been leading and the index has pulled in a bit. Back then however, small caps were still the leadership whereas they have been lagging for a few weeks now. As expected we are bouncing off this long term trend line on the first glance. Since this rally was led by a narrower group of stocks this moderate selloff has already created near term oversold conditions – at the open the NYSE McClellan Oscillator had a reading of -70. It was -53 Wednesday before yesterday’s bounce pushed it into the -30s. This can get as bad as -90+ but generally a -50 reading or worse is where a short term bounce can happen.
Much like February the same comments go – what is the nature of the bounce? That one had all the hallmarks of being “the top” but it wasn’t. We have even more conditions in bears favor this time around (bonds are higher than February levels – leadership even narrower as shown by % of stocks over the 50 day MA, for example), but they have been burned so many times trying to bet against Bernanke I am sure the will is gone. Which would be typical of the market to selloff when people have given up trying to bet against the market.
With that said all these warning signs HAVE led to corrections in almost every major market in the world – except the U.S. and Japan (and a few minor ones like Mexico). It sure isn’t your father’s stock market, eh?
The next week or two should give us good answers about this bounce. If the market simply rolls back over and breaks this trend line we finally should have the intermediate top in – any bounce that does not create a new high would also create a head and shoulders formation. This is all happening as we begin earnings season so it is going to be a very interesting and I suspect, volatile road ahead.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
