FLS Update: 9.25.14
Defense is King; Sellers Back In Control
Sellers Are In Control
In Tuesday’s update, we mentioned “the day something changed” and said that, “On Monday (Sep 15) something changed. A slew of leaders were hit in heavy volume. We wrote the following day and said the action is not healthy and reminds us of how the market looked in March/April of this year (which preceded the year’s largest pullback). It is tremendously important to continue to watch how leaders behave in the days/weeks ahead. If the selling gets worse this little pullback will likely get worse.” So far, the selling has gotten worse and the sellers are now in clear control of this market (in the short term). Defense is king as we are now seeing a lot of technical damage occur across many important areas of the market. To be clear, the market is acting toppy up here (we’ve mentioned in recent weeks that “it feels a little top heavy up here”) and we will continue to monitor the situation closely for you.
From where we sit, the biggest problem, that virtually no one is talking about right now, is what will happen when QE 3 ends? Remember, when QE 1 ended, the S&P 500 fell -17%, when QE 2 ended it fell -22%. What will happen when QE 3 ends? The reality is no one, not even the Fed, knows how to answer this question…since this is the largest (and unprecedented) coordinated experiment from Global Central banks. The “good” news is that Central Banks have said the easy money train is here to stay and if conditions worsen, they have made it clear that they have no problem providing more “liquidity” (e.g. QE 4, anyone?), If needed. As always, it is never a dull moment on Wall Street, stay tuned…
Bifurcated Market Continues
Earlier today, I was quoted in MarketWatch (read here) where I expressed my concerns about the market (in the short term). The Russell 2000 remains the weakest index and continues to woefully under-perform its peers. I told MW, “While small caps had previously led the stock-market rally, it’s normal for them to begin to lag as bull markets mature, Sarhan said, but it could point toward further overall weakness.” “Now that they’re rolling over and lagging, that could be a canary in the coal mine that a big top is [potentially] forming in small-cap stocks,” he said. “If it starts forming in the S&P and Dow and Nasdaq, then you can have a more ominous picture develop for the short [and] intermediate term.” I attached an annotated daily chart so you can “see” what I’m seeing. To put it nicely, the action is “not pretty.”
Good Job Not Buying
The service has been very selective over the past few weeks. Turns out, that was a a great call. Stay with us as we continue to keep you two steps ahead of the market.