Yellow Flags Dot the Landscape

 | Jan 18, 2012 | 7:30 AM EST
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I know I'm not the only one thinking that, one way or another, this market is soon going to give. What looked like a strong session for stocks Tuesday ended mostly disappointing as buying demand dried up late in the session.

 It's fairly black and white at this point. Either new money will come in from the sidelines and keep the rally going or sellers will gain the upper hand. I expect that volume will start to pick up this week as earnings season kicks into high gear. The S&P 500 has been rising in light volume since Dec. 20. It's only a matter of time before volume starts to expand. The question is: Will buyers or sellers be in control?

I thought there was a chance we could see volume come into the market Tuesday, but that wasn't the case. Volume started off strong on the NYSE and the Nasdaq, but it ended with a whimper. Despite a 116 million-share day for Citigroup (C), which normally trades about 50 million shares a day, volume on the NYSE was below average, at around 750 million shares. Turnover was slightly above average on the Nasdaq, at nearly 1.8 billion shares, but the tech index showed bad price action. Ultimately it closed in the bottom half of its trading range due to lack of buying demand.

It's a busy week of tech earnings, particularly in the Nasdaq 100. Microsoft (MSFT) showed weak action Tuesday on above-average volume. After hitting an intraday high of $28.65, the stock closed near its session low, adding $0.01 to $28.26.

I was asked on my podcast Tuesday about current market concerns, so I'll elaborate them here.

I've written a lot in recent weeks about how weak volume makes for a weak foundation, whether it's an individual stock or an index. The market foundation will remain weak without bona fide signs of institutional buying. What does bona fide institutional buying look like? How about a 1% gain or more on the Nasdaq on volume of at least 2 billion shares? It would be a start.

I'm also concerned that the dollar index isn't showing any signs of an imminent breakdown. The stock market wants a weak dollar, so if the greenback remains strong, it will continue to be a headwind for equities. Near-term support for the dollar index is the 20-day simple moving average at 80.49 and the 50-day-moving average at 79.24. The index closed Tuesday at 81.18, down 0.4%.

Dollar Index -- Daily

In addition, the recent market hesitant action gives me pause, especially when it comes to growth stocks trying to take leadership roles. I see growth stocks with good charts that aren't going anywhere. Some are acting well, such as Nuance Communications (NUAN), Panera Bread (PNRA) and Whole Foods Market (WFM) but plenty more are showing what can only be described as wishy-washy movement. You don't see this type of action when new institutional money is coming in from the sidelines. Breakouts are decisive, not begrudging.

We see an example of this in SXC Health Solutions (SXCI), a provider of pharmacy benefit management services and health care information technology systems. The stock looked great when it broke out in heavy volume Jan. 10. It even followed through the next day in heavy volume. But shares lost 5% over the next three sessions in heavy volume. That's unhealthy action, even though the stock continues to hold above a swing point of $60. In a healthy market, breakouts generally don't act like this.

Meanwhile, volume has been light seemingly forever in Apple (AAPL), except when it reversed in above-average volume on Jan. 9. If you're looking to buy Apple ahead of earnings, my overall take is that the risk outweighs the reward at current levels.

Also, even though Google (GOOG) continues to hold above a recent buying area of $618, its recent above-average volume decline on Jan. 9 can't be completely ignored. Big investors were in there selling on that day. To its credit, the stock continues to hold above its 50-day simple moving average.

Finally, several high-quality names are trying to make moves out of late-stage bases, including Chipotle Mexican Grill (CMG) and Monster Beverage (MNST). When a stock has already made a huge price run, breakouts from late-stage bases can be short-lived.

The bottom line is there are enough yellow flags out there to warrant treading cautiously, especially since earnings season is just getting under way. I'm hoping the news will be good in tech land later in the week, but the big question mark is whether it will be good enough to fuel more gains for the market. The risk that remains in this market cannot be ignored.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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