What a day it has been with price finally providing confirmation of an equity correction that the technical indicators had been suggesting for some time.
Here below a technical update due to the market conditions.
Here the four major US indexes.
We have got the long awaited price breakdown in the sp500 Dow and Russel2000 today. The Sp500 and the Russel are much less price convincing than the Dow’s move, in price technical terms. We can judge that this is a EM and Chinese related worry. China affects the Dow components more than she does the Russel and even Sp500. The Nas100 has not scored a price breakdown at all which is interesting. She remains in reasonable shape price chart wise.
The prior technical indicators of health of the indexes goes as said previously holds of course. Ie across multi indicators they are weak and looking to correct. It was always price that was the non confirming issue. Now we have partial confirmation so we must sit up and pay attention.
The question on the street amongst speculators minds is likely to be is this merely a corrective move post the Xmas rally to reset prices or could it become something more meaningful? I suggest, at least in the next month or two that, given the excessive bullishness, weak technicals, low volume and high leverage, it may be a more painful correction than many assume. In my mind, the move to the downside is likely to be fast and harder than most imagine due to these technical issues now that price has confirmed the move.
Here the latest Yardeni briefings.
And here Yardeni on earnings, stretch is the word
If you buy into the view above that this could be a more meaningful and extended correction then the next question, if you are not already short from a higher level is where and how?
Sectors wise ill leave to another post but id like to focus on which price levels and which indexes and with which instruments.
Which US indexes first?
The Dow is the immediate weak link price wise with a clear breakdown of her price chart. So the dow has started this price technical breakdown move but will she be the beta to sustain the move from here? I doubt it. If the dow components struggle its usually a lead indicator on the world economy. The Dow components are struggling to keep revenues if not margins growing. The news from China over night fueled the concerns from the large caps due to earnings season and the forward looking statements.
The US centric Russel2000 companies are fairing better just like the ftse250 companies on the lse as domestically the monetary and fiscal policies stimulate local demand in the two economies. And the nasdaq and nasdaq100 is harder to define but clearly is an index, especially the nasdaq100, all about international business investment in technology. Yes, capex!
Compare here the price charts of the Nas100 vs the Dow over the last 10days.
It therefore follows that we might expect the nas100 focused companies to be seeing more selling pressure than they might here. Especially given the run up they have enjoyed. The nas100 offers a current pe ratio of 26.5. The Russel more. The Nasdaq100 also demonstrates perfectly on the near term the divergence again between price and near term price momentum indicators. A higher high but fading and weak price momentum which reconfirms all the non price market breadth etc weakness that the nas100 also has been demonstrating better than the other indexes.
Cutting to the chase, is it the nasdaq100 that offers the greatest divergence between having some of the weakest technical indicators and the strongest price chart.
Here the 2013 performance of the different indexes
Here some technical charts on the market breadth issues within the nas100
What we should be looking for here is divergence between the two. And sure enough the latest higher high on price diverged perfectly from stocks moving beyond their prior 200 dma high.
Next up 52wk high.
Here, once again, new 52wk highs were unconvincing on the latest price breakout.
And next a near term indicator. Stocks making new 10 day highs.
The momentum in the nas100 was and is definitely fading. The medium term technical indicators have been weak and divergent for sometime.
The nas100 is therefore my target.
Since ive been typing this i see the nas100 is playing catch up with the other indexes. The sell off is widening and the nas100 is starting to join though she still offers the best price technical chart. Attacking price charts like this is usually not the correct tactical play at all. But I believe there is enough, more than enough, non price weakness in the Nas100 index so suggest she will offer the beta eventually to the US index correction. Only the Russel2000 can stand in her way to achieving the index alpha correction crown.
Instrument discussion must continue on the forum pages. I hit some technical issues in posting this report that has held things up so I’m out of time to run through the rational, for now.
I hold a mix of sp500 and nas100 etfs short and the weight of shorts are Feb and March future option puts out of the money at the entry by around 3%. Now less. At present i’m 40% hedged or at 60% long on the account value but hold many defensive stocks rather than the cheer leading cyclical themes.