A Rising Tide Has Lifted Few Boats

The Market

The signs are all there: the narrow market, as indicated by the poor breadth, the lack of stocks making new highs, the increasing new lows. There is even narrowness in the technology group, namely the semis where the SOX has only 13 of the 30 names having hit new highs last week. For those who struggle with math, that is less than 50%.

Yet we don’t really get any breakdowns. The Transports, which I have been harping about for months now, broke down on Friday—or did they? They rallied back 250 points to close much closer to the high of the day than the low of the day. Oh, and there was a black cross (when the 50 dma crosses under the 200 dma) last week.

Friday folks got a bit hysterical over the Transports but I saw a lot of griping about the industrials as well. Here too, the XLI has been sideways for months. Does it look like a top? You bet it does. But given the chance to break that 120 level we looked at back in April, it still hangs on, by its fingernails.

Remember IGV and how awful the software stocks were since February? Look at late May. The gap down, the break of support and then wham! Right back into the range they went.

Nearly two months ago I showed you this chart, the S&P relative to Nasdaq. I thought as long as we had that sideways pattern that we had had for nearly a year the market would continue on its merry way, but break out of that range and the market typically has a move to the downside to reset things. I figured we’d see the breakout to the upside. 

Take a look: since that low in April this ratio has been straight down. It had a tiny little breather in late May. So even the S&P is underperforming Nasdaq. Again, when things have been steady for so long and something changes in the pattern like this, the market usually corrects to reset things. We have yet to see that correction.

We know sentiment is too bullish but there was a change last week. We have yet to see it in any of the indicators, but we can feel it all around us. We are getting to the point where the divergences are so obvious. If we do get some breakdowns my guess is folks will turn bearish in a hurry. 

The Hi-Lo Indicator is already at .40 (shown below). The Volume Indicator is already at 49%. These indicators reiterate exactly how weak things have been under the hood, and for how long they have been that way. Continuing on the way we are is unsustainable. A sharp move down would change sentiment and get the overall market to a good oversold again. I don’t think rallying the ‘others’ as catch up right now will accomplish that, it will just keep the hope alive.

New Ideas

I am starting to warm up to McDonald’s MCD. Part of it is my penchant for down and out stocks. But how many more articles can you read about the $20 minimum wage and how it’s killing fast food? At some point all that bad news gets priced in and MCD has been in a downtrend all year.

We had a great trade in Analog Devices ADI in the spring. It had a target of 240, got there, backed off, and tried to exceed it and couldn’t. Now I think it has a good chance of filling that gap below.

Today's Indicator

The Hi-Lo Indicator is discussed above.

Q&A/Reader's Feedback

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I promised to follow up on Pepsi PEP and it has now spent a few days trying to hold down here, and has. My guess is it is quite early and it will need to pop and drop a few more times before it can go anywhere but I’d say this 160 area has proved to be support for now.

The question is when can we buy Amgen AMGN back. For now it is holding this 295 area. I’m not sure I trust it to do much more than bounce right now. I would love to see more sideways action.

Dell DELL should bounce from here but I’m inclined to think just a bounce right now.