Equities Near a Crossroad

The term ‘inflection point’ in the context of markets is a bit overused, in reality we are only able to identify inflection points (10/4, 10/27, 11/25, etc.) in hindsight. For example, I had a pretty strong intuition that 11/25 was a golden buying opportunity but at the time it was far from easy to pull the trigger on the buy button.

If equities continue on their upward trajectory we will probably look back at December 19th and say that was the inflection point that initiated a new uptrend – $BAC put in a capitulation bottom below $5 that day and many will say that since BAC was one of the first names to sell-off early in 2011, therefore it was fitting that it was among the last to bottom late in the year. However, if the market runs out of steam over the coming days and the S&P 500 ($SPY $SPX) heads back below its 200-day SMA and back into the dreaded “range” then we will point to some new inflection point as springing yet another bull trap.

Regardless of what happens over the coming days & weeks it is clear that we are at an important point; many sectors and individual names have broken out of multi-month ranges and there are many more healthy looking “setups” from the long side. However, many charts are also becoming stretched to the upside and have begun to exhibit early signs of exhaustion. Let’s go to the charts:

 

Russell 2000 ($IWM $RUT) – Closed just below major resistance, above 775 enters a vacuum which could easily send it 2-3% higher.

 

The percentage of NYSE stocks trading above their 200-day moving averages crossed above 50% for the first time since early August – This is just another piece of evidence that the trend is on its way to becoming an uptrend, although a strong confirmed uptrend should have over 70% of stocks trading above their respective 200-day moving averages. Notice how this chart looked during the 2nd half of 2010 as the market transitioned from a messy range to a strong uptrend:

 

There are a lot of charts out there that look overextended, tired, and in need of a pause/pullback:

 

$HD back to its 2005/2006 highs, meanwhile the $XLF names have been on an absolute rocket ship higher:

 

$PNC looks a bit overextended as it approaches 52-week highs

 

$JPM reports earnings tomorrow morning: This looks like a perfect “sell the news” setup.

While certain individual names and sectors appear ready for a breather, the major indices such as $QQQ are in healthy uptrends that are not yet overextended. Pullbacks have been bought and dips have been relatively shallow – Volume has been lacking although that alone is not sufficient evidence to cast doubt on the recent rally:

Finally, it is interesting to note that many of the publicly available sentiment surveys as well as some of my own sentiment work are flashing some signs of overheating. Meanwhile, many of the investors whom I speak with and research reports that I read are generally on the cautious side. Mark Gongloff has an interesting piece up on this subject of “Investors Talking Like Bulls, But Investing Like Bears”. I think Mark is on to something here, however, I don’t buy into the notion that there will be a massive flood of funds into equities in the event the SPX  breaks out to, say the 1330 level. The people who are in a position/predisposition to be long equities are already long, it will take a lot more than a minor breakout in the indices to bring in the last holdouts.

 

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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