When I joined TheStreet in mid-August I quickly wrote many bearish stories on stocks and bullish stories on bonds and the TLT. The market had peaked in May. A Dow Theory sell signal was in place and the Advance-Decline I follow had peaked back in April (chart below).
As I looked at stock after stock -- a bottom-up approach -- I found stocks were breaking support, moving below their important 200-day moving averages while volume was expanding on down days -- a sign of aggressive selling and liquidation.
It was a rocky few weeks before we hit bottom with a high number of new 52-week lows, white knuckles and fears of the next great depression. Then we had a retest at the end of September. The bear in me went back into hibernation, looking for that secondary reaction that Charles Henry Dow talked about some 115 years ago. Secondary reactions can typically last from three weeks to three months. The rally this fall has been a counter-trend rally against the primary downtrend. We have had that rally and sentiment quickly turned back to bullish. Chartists can cite all kinds of sentiment studies or ratios, but I simply judge sentiment by the "push back" I get from bearish stories and emails from subscribers who tell me they have just bought some 3X leverage long ETF.
But the Advance-Decline line has moved up slowly during this secondary reaction (chart below). If the Advance-Decline was a stock, you would probably sell it.
Today we are making fewer new 52-week highs. I find fewer and fewer compelling long ideas and plenty of other names that are rolling over again. The pattern of trading has changed from buying the lower opening to selling the higher opening -- a subtle shift that speaks volumes.
Everyone you read online and in the old school newspapers and magazines is looking for the Santa Claus rally, or that great and reliable year-end markup phase. Hanukkah ends soon, so the "presents" from the marketplace are running out fast and I want to aggressively raise cash and scale into U.S. Treasuries.
We have booked profits on a number of story stocks -- Keurig Green Mountain (GMCR), DuPont (DD), Dow Chemical (DOW), Angie's List (ANGI), and Rite Aid (RAD) -- and will continue to do so if the opportunity presents itself. But we want to go through all our bullish recommendations since September and either trim, book profits, raise sell-stops or just buy at the money calls to cut down the risk. There are just a few Dow Industrial names that are still in uptrends, and that is not a healthy condition. And what about FANG -- it reminds me of the 1970s with the Nifty Fifty.
For those of you who were not involved in the stock market way back when, it was a time when people were enamored with one-decision stocks. You bought them to own them forever! Things (read money) got very concentrated and we have that again today, I believe, with FANG, Action Alerts Plus holdings Facebook (FB) and Alphabet (GOOGL), Amazon.com (AMZN) and Netflix (NFLX) . These four stocks might now be considered to be over-owned, over-loved and maybe overvalued. Either way, it can be problem going forward, in my opinion. The four charts below show the trendlines that traders and investors should monitor. A break of these trends could make for a nasty 2016.
No I am not the Grinch, just a simple chartist who doesn't like this market. The four-and-one-half-year cycle suggests that the first half of 2016 could be trouble until it bottoms again around mid-year (see our last chart below).
The next cycle low is anticipated for mid-2016 and should be a great buying opportunity. Keep your powder dry.