The Bulls Show Early Signs of Fatigue
Another week passes and yet another new high for the Dow. We would have to go back to 1927 to find the last occurrence in which the Dow Industrials had as long a winning streak (24 of 27 sessions). On Tuesday of this week this great run was finally snapped, albeit by an ever so slight amount (The Dow finished down 4 points that day). The S&P's closed over the psychologically important 1500 for the first time in six and half years, inching ever closer to the all-time closing high of 1527.50.
What is being lost among all the bullish headlines are the fact that the Russell 2000 (Small Cap Index) and the Dow transports have lagged this week. In my judgment these are early signs of a market that is becoming narrower. Simply put, as the market continues on its upward track, fewer and fewer stocks are participating. Does this mean that the Bull Run of the last 9 months is over? It's too early to say. What we should keep in mind is that the higher that the market goes unimpeded, the risk of a correction becomes greater. Also, the risk-to-reward ratio begins to slant unfavorably.
It seems that every time the market looks like it's going to rollover, the "buy the Dip" crowd comes to the rescue, snapping up shares and providing an underpinning for the market. These folks have been rewarded handsomely over the last few months and until this tactic stops working, they'll continue to buy the corrections. I will be watching to see when this strategy ceases to become profitable, as this will be a telltale sign the market is changing course. On the flip side of the coin, traders that have been betting against this rally are probably in a world of hurt.
In our weekly review of the charts my first focal point is the contrast between the YM (Dow E-mini) and ER2 (Russell 2000 e-mini). It is clear that the YM (chart below) is the strong market, just by the shear magnitude of the distance above its prior high break-out. (450 points)
If we look at the ER2 chart below, we see a stark contrast. The ER2 has not even been able to breach the February highs, let alone break above. This is definitely a cause for concern. The health of this market is dependent on all the major indices moving in-sync.
There are two possible scenarios here. The first one, and more favorable outcome for the Bulls, is that the ER2 and some of the other lagging indices play catch-up. The second, and more bearish scenario, is that the Laggards drag the entire market down for a much-needed correction. I am beginning to lean towards the latter.
In Summary: if you have been reading my newsletter over the last couple of months, you know I have tilted decidedly bullish. Last week, for the first time in a while, I became a bit more cautious. I am not an outright bear by any means, but I do get the sense that the market seems somewhat tired here. The day I'm finishing this article happens to be the day the FOMC is meeting to decide monetary policy. The Street is expecting the Fed to leave rates unchanged, but will be more interested in the language pertaining to inflation. Obviously, how the market perceives the statement will be telling. We shall see how this will all play out.
So until next time, I hope everyone has a profitable week.
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Gabe Velazquez is a professional
trader with 14 years of experience. His focus is intra-day and swing trading the
ER2 (Russell 2000 e-mini) using technical analysis as his primary tool. Gabe has
managed both stocks and futures accounts as well as conducted educational seminars
on technical analysis for the past ten years. He is a frequent guest on Biz radio,
where he shares his market knowledge and utilization of technical indicators.
Gabe also teaches the