“When the forgotten old dogs begin to bark & spearhead the market advance, the stock market is on its last feeble legs.” – William O’Neil
Last week was triple-witching option expiration week, the market made small advance helped by the strength in bank and healthcare sectors, but many other leaders have behaved suspiciously with some sold off hard considerably. Internals were in doubt!
After a brief 3% correction, the market has reversed up and climbed nearly 5% for past three weeks. S&P 500 rose over 68 points from its low of 1,485 hit on Feb. 26th to its high 1563.32 reached last Thursday.
But the market internals have weakened in recent sessions!
The strongest stocks are either stalling out or pulling back from their recent highs, such as GOOG, PCLN, AMZN, KORS, WHR, GS; the beaten down laggards bounced up sharply despite some of them retreating seen in VMW, MLNX, FSLR, AAPL; and also some weak names kept being sold off further to their year lows, such as ISRG, BIDU, ULTA, RAX, DDD, and ISRG is one of wild puppies mentioned repeatedly with huge bearish reversal. GOOG had an exhaustion gap when it hit recent high of 844 on big volume before pulling back, mentioned on Twitter.
There is a saying: Don’t short a strong market as 80% of stocks tend to follow the overall market trend. However, plenty of individual names have acted alone based upon their own charts and price action, not following the broad market trend, and it is an interesting character of the recent market rally.
In conclusion, there are a few caution signs for a serious market pullback:
- The market rally is now four-month old since November low, mature enough for serious profit taking.
- The volatility index or VIX is below year 2007 low near 11, a sign of complacency.
- The rotation seems to be running out of gas with only beaten down stock trying to snap back, helping market stay up.
- The random price and whipsawing action were seen everywhere, and it’s hard for traders to hold positions overnight, a sign of instability.
With the end month/quarter window dressing near, we will likely see further gyration moves as institutions would re allocate their portfolios. As traders, it’s time to keep our sense guarded, have powder dry, be flexible, and be objective. Best luck on trading!