It appears it's all over for a while folks. Our last post gave the market time to exhaust itself with a few last gasps. We think it's downhill for the next few weeks at least. We'll be locking in profits here.
The VXX tells a good technical story. The fear index is showing a sudden thrust upward, a pullback to previous resistance and resumption of an uptrend. That is very bullish for fear and selling. Prices are likely to head downward in a significant correction. We believe it's time to bring out the kevlar unless you are shorting.
If you're still a bull, yes sometimes the market is just unpredictable and a little wacky, so good luck. Chances are though, a lot of investors are going to be convinced it's time to take those sweet returns, at least for the short term.
As we mentioned in our previous post, the Russell 2000 is the gold standard of stock baskets when it comes to predicting the moves of this market.
We were watching 2 critical levels in the Russell, the 900 mark for a move lower and the 950 mark for a move higher.
950 was breached, and the overall market just kept moving upward, much to the amazement of most analysts, who never predicted anything like this when they took an early look at what to expect in 2013. What's next is anyone's guess at this point. More upward momentum is possible in the near term unless there is a clear catalyst that sours the overall exuberance we are witnessing. Is this move way to much considering the economic conditions worldwide? Of course - but that's thinking logically. Money flow has nothing to do with logic. It has to do with what market participants think they can squeeze out of a trend. At some point that thinking will reverse the market direction, and money will be made by those on the short side. Once the big money decides short is the way to go - watch out. Keeping a close eye on those trend lines is essential in the next few weeks.
If you're looking for the early moves in a market gone soft, look first to the small caps. Often it's the smaller companies that feel the pain and react with more volatility in the first stages of downward momentum.
The Russell 2000 chart is currently stuck in a range that may have the longs re-considering their positions as a rounding top appears near 950. There seems to be clear resistance up there, and at the same time the index is hovering very close to support at 900. A break of 900 could mean significant downside.
Weakness on the daily charts is everywhere for most of the big stocks and we are posting a yellow flag on this hyper-charged market. It's tough to say whether it's 2 days or a few weeks before a major pullback and just how significant the move will be, but we have decided cash looks really good considering the softening we are seeing in the current market. In addition to a sudden topping pattern on the indices, and concerns over when the Fed might stop manipulating the markets, there is a bank robbery underway in Cyprus. Somebody should call the cops. Those who think the Cyprus dilemma is small and insignificant may soon change their minds. An EU deal based on the legislated robbery of those who used to trust banks is a deal that could very well shake the confidence of the entire Euro zone. Are other countries insulated from this madness? No. Investors should carefully monitor the level of panic this deal generates. Be prepared to hear the word "contagion" repeated many times over the next few days and as always - follow the money. You will hear a big sucking sound as billions of Euros drain from the already fragile Euro zone. There's no denying Europe is back in the big picture. So is Japan, with policies that are likely to cause an unprecedented spike in consumer prices. The international seas have grown stormy, and the impact will be felt in North America.
The Technical Side
Technically, you could draw a line along the the lows from late last year until now and argue that everything is straight up, not a problem. That's true, it is a straight line and the market could have legs for a while longer. But what's concerning is the daily chart's new sideways top. It suggests the real buyers are getting tired and the rocket fuel is running out. Combine that with a CCI that flagged overbought conditions and is now divergent from the the past month's direction. Then consider levels - an S&P 500 that sits at pretty much the same level we hit before 2008. Need we go further? That's the question. Retail investors might chase the dream a little longer, but smart money is getting very cautious.