I always try to keep an open mind when it comes to the stock market. I look at the positive and negative signs and adjust my investment levels accordingly. Unfortunately, I am seeing more negative signs right now and feel that some caution is warranted.
NEGATIVES:
1) The number one sign I use to evaluate the health of the market is the price action of leading growth stocks. The recent selling in many leaders is a little worrisome. Examples include $NFLX $PCLN $TSLA.
2) I have noticed more put option activity over the last two weeks. Some of the sharp option traders I follow have confirmed this observation.
3) QE is slowly winding down.
4) The Nasdaq Composite has seen 5 distribution days in the last 14 trading sessions, and the Russell 2000 $IWM is below its 50 AND 200-day moving averages.
POSITIVES:
1) The Dow Jones, S&P 500, and Nasdaq Composite are still above their 50-day AND 10-week moving averages.
2) There is notable strength in the Biotech sector (across all market caps).
3) The fourth quarter is coming up, which is traditionally a strong time to be in the market.
CONCLUSION:
Over the past 2 years, there has been nothing wrong with being cautious at times, however, it hasn’t paid to get too negative on the market. It seems like every time some warning signs appear, sentiment gets extremely negative and a magical bid appears to prop the market up. Of course, one of these days this won’t happen and it will catch many off guard. I’m not saying this will happen now, but always keep an open mind. If you are a trader, there is nothing wrong with raising some cash and waiting for more positive signs to appear.
I can be reached at: jfahmy@zorcapital.com.
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