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Food For Thought
Author: James Brumley (info)
Website: http://bluegrassportfolio.com
Posted: May 1st, 2007 at 7:46 am EST
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When 19 of the past 21 trading days are winners, something like yesterday (for the Dow) was bound to happen. The question is, was Monday really noteworthy? Our answer is….not exactly yet. Yes, the market took a big tumble, but it wasn’t that big. The Dow lost 0.44%, while the NASDAQ took a 1.26% hit. Not fun, but not a disaster. After all, we’ve seen comparable dips made a couple of times over the last six weeks or so.
It’s a point we want to bring up this morning, as there seems to be some whispering now that the market has hot (or is close to hitting) a top - right in front of May, which is historically a weak time of year. In fact, we’ve been one of the protagonists on the ‘could be bearish’ march. The difference between us and the others, though, is that we only discussed what it might look like if it was indeed a pullback in the making. As always, we want to stick with the trend until we have clear proof we shouldn’t. We have solid bearish arguments, but nothing highly conclusive.
Now, all of that was said to set the stage for today’s comments.
It’s easy to be a bull when stocks are rising. It’s easy to be a bear when stocks are falling,. What is hard is to be a bull when stocks are falling. But, those particular bulls may be right this time around - the persistence of the buyers has been uncanny.
So what’s the tell-tale sign? For us, it’s going to be what happens when and if we revisit the 10 or 20 day moving average lines. And by the way, the S&P 500 ended up being parked right at the 10 day line (red) yesterday, with its close of 1482.35. The 20 day line is at 1467 (blue).
But what exactly are we looking for? In a word, support. A substantial move under the 20 day line could be a signal that things are indeed too frothy to stay bullish. However, we ain’t there yet. Given the nature of things right now, it may be wise to wait and see how things pan out….the market may indeed find support here, and continue to the bullish romp.
We’re also watching the VIX, as you know. It was particularly interesting yesterday, as it closed at what was essentially a month high, pressing in the upper 20 day Bollinger band.
From a momentum perspective, you could say that was bearish. However, take a look at the VIX’s chart going back to November. With only one exception, the upper band acted as a ceiling, quickly pushing the VIX lower, and in turn pushing stocks higher. See why we don’t want to jump the gun? If the VIX makes a couple of consecutively higher closes above the upper band line, then the bears can start talking about getting back to business.
S&P 500 with VIX - Daily
Oh, and did we mention the MACD lines as well as the stochastic chart are poised to make bearish crosses?
All of these things are on our radar, yet none of them are really ‘clinched’. As bearish as a lot of folks want to be, we repeat again - don’t rule anything out. It may be a rarity, but spring/summer doesn’t have to be weak for the market.
We have no doubt we’ll have a clarifying discussion with Wednesday’s MidWeek Update. In the meantime…
We haven’t looked at it in a while, so maybe it’s time to break out the style/cap performance comparison chart again. As a quick reminder, this is just a breakdown of recent results segregated by market cap (large, mid, small) and style (value, growth). Colored labels are on the chart.
Though they may be long-term leaders, the small-cap value stocks (based on the S&P 600’s value stocks, red) has been in the lower half of the making since the beginning of the year, and as of Monday, is now at the bottom. While this is still by far the most rewarding place to be over the long haul, it may not be the ideal spot in the current environment.
Despite Monday’s slide, the mid-cap growth stocks (based on the S&P 400’s growth names, pink) is still leading…even if only by the virtue of lagging less. (continued below)
Cap/Style Performance since 01/01/07
Mid-cap value and then small-cap growth took 2nd and 3rd place. Large caps were dragging the bottom for the better part of the year, until small-cap value took that dis-honor yesterday. That was a bit surprising, as it was supposed to be large caps leading the recent rally. Guess not. Small cap growth, then mid-cap growth, remained the market’s recent leaders. (continued below)
Cap/Style Performance since 03/05/07
Implications? Follow the leader, avoid the laggard. We’ll continue to monitor this chart and update you with any changes.
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James Brumley, Stock Market, Trading
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