On the face of it, equity markets appeared to have a pretty good day on Wednesday. I, however, am not the slightest bit convinced the Wednesday buyer has the conviction to see this advance through to new year-to-date highs. Before I address my concerns, let's review a few bullish areas of the market.
Healthcare, biotech and consumer durable-related stocks dominated Wednesday's session. In fact, the Health Care Select Sector SPDR (XLV) and iShares Nasdaq Biotechnology ETF (IBB) both finished Wednesday's session at an all-time closing high. The Consumer Staples Select Sector (XLP) came within pennies of accomplishing the same thing. Suffice it to say, all-time highs can only be interpreted bullishly. Contrarians and bears can point to momentum divergences and questionable valuations until they're blue in the face. The bottom line is the bulls are still in complete control of this area of the market.
Select areas of the energy complex began to find their footing on Wednesday as well. I say select areas because nearly anything having to do with offshore drilling is still being sold with reckless abandon. One of the only offshore names to bounce at all on Wednesday was recent Noble (NE) spin-off Paragon Offshore (PGN). And just to be clear, up until Wednesday PGN hadn't been able to buy an uptick in the nearly seven weeks it's been a publicly traded company.
The areas of energy that managed to catch on bid on Wednesday were traditional oil service companies, select integrated stocks and a few independent oil and gas names. Rather than review a dozen different names, it'll be easier to direct your attention to the Energy Select Sector SPDR Fund (XLE) and highlight that ETF's long-legged Doji candlestick pattern.
For those unfamiliar with the long-legged Doji pattern, it simply refers to a scenario where significant price volatility occurred during the trading session, but the session's open and close happened at roughly the same spot. When such patterns are identified in a down-trending market, the general assumption is that supply and demand are beginning to balance out. And the previously dominant group -- in this case sellers -- are beginning to lose their stranglehold on the market. The next thing oil bulls need to see is a close above the roughly two month downtrend line in Light Crude Futures and the United States Oil Fund ETF (USO).
Now for the uglier side of Wednesday's price action. The bulk of the weakness was found in the usual suspects. Anything having to do with coal, gold and silver mining or offshore drilling was blasted. But that's not all. Sustained weakness was also found in the Utilities, REITs and high-yield bond ETFfs.
Lots of attention has been paid to the weakness in small caps, but what about the REITs? In the span of 13 trading session, the iShares U.S. Real Estate ETF (IYR) has declined more than 7%.
My lack of faith in Wednesday's broad market buyer has nothing to do with the ongoing slaughter of all things mining and offshore drilling, and more to do with market breadth and overall trade location within the composite E-Mini S&P 500 volume profile.
As you can see, buyers responded (again) to prices at the bottom of our composite profile. This is perfectly normal. My complaint has to do with the fact that the Es broke balance to the upside on Sept. 18 and over the course of four trading sessions traded all that way back down to the bottom of that composite balance (1970). In my view, chasing strength into 2000 carries with it a relatively high degree of risk. As such, my inclination is to sit on my hands and stalk a short entry on any momentum reversal in and around the 1998-2001 area.
As far as breadth is concerned, it seems a bit strange to see the advance-decline line up barely more than 600 and new highs at a paltry 26 on a day where the Es advanced roughly 18 points, and closed less than 1% from a new life of contract closing high. The bottom line is I expect the intraday trading to remain volatile, and wouldn't be the slightest bit surprised to see a single session's gains reversed the very next day.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at email@example.com or posted to my twitter feed @ByrneRWS.