Marketview: A Word of Caution

• Posted by DynamicHedge
• on October 13th, 2012

The fired up bulltard in me wanted to go with “Smells like a bear trap” as the title of this post, but the level-headed veteran won out with “A word of caution”.  In the long-term, I’m still very bullish, but there are cues whispering ever so softly to “slow your roll, son.”  This week continued the disturbing trend of selling off on good news.  I shrugged it off last week when we topped out on the Friday NFP report, but it continued thru the weekly jobless claims and a very upbeat consumer sentiment reading.  This is a very different tone from the last couple months and must be taken seriously.  Secondly, in the last couple weeks I’ve been writing about our MAMOx indicator being very close to flagging a negative skew.  This week, it closed basically at zero, indicating that  trend change is underway.  As you can see below, the indicator has been quite reliable (blue line above the zero means bullish and below is bearish):

 

Long-term everything looks quite good.  Consumer sentiment is indicating that people are feeling more normal and less “new normal” with readings back to the 2007-era range.  Leading indicators are still rising in the face of various economists calling a recession.  China appears to be bottoming out and could have a positive skew for the first time since June.  Lastly, employment is still moving in the right direction.  Basically, everything from this post is still working.

The economy is not the market and the market is telling us that there is significant supply at these levels and caution is warranted.  The MAMOx indicator is sensitive because it has additional credit inputs not used in the slower MAMO.  Credit markets tend to move before equity.

I hate to go against my long-term bias and if I were to yield to my bullish impulses I would point at this potential bear-trap with breadth not confirming as proof that the market wants higher prices:

This week utilities, consumer staples, and financials showed the most strength with consumer discretionary, tech, and basic materials showing the most weakness.  The inability of basic materials stocks to get up off the mat is surely frustrating those who bought anticipating a QE3 basic materials party.

Winners: $FDX, $NSC, $HAL, $SLB, $DVN, $C, $JPM, $GS

Losers: $T, $VZ, $AMZN, $TWX, $DIS, $TGT, $COST, $HD

Currently, I’m in a state of forced neutrality amidst a backdrop of bullishness.  Do not fight the powers that be.  Pullbacks are still the high probability play for the time being.  Buying into the margin liquidations of your competitors should continue to work — just make sure you’re ready when they happen.  There will come a time, a first since authoring this blog, when I will become a full-blown market bear.  We’re not there yet, but I can feel it coming… stay tuned.

As a side note: I’ve been working on a project that has diverted my time from this site but I will be shifting priorities and re-focusing my energy on posting several times a week from now on.

Read also: Darkness is spreading (DynamicHedge)

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