Based on Market Monitor readings, price action in rally leaders, and the action in laggard stocks, a correction is in early stage of development here.
Markets will try and make repeated attempt to breakout but a breadth climax happened this week and that has to get resolved.
That means two possibilities either a slow grinding sideways move or a series of 500 plus downside days on stocks down 4% or more.
The action in laggard stocks like C, AIG, and other financials suggests the second scenario is most likely.
When market runs out of good stocks to run, there is a intense set of 3 to 5 days of speculative frenzy in beaten down names, Chinese stocks, heavily shorted stocks, and some random stocks.
When pig begin to fly it is time to be cautious.
One of the problem with such corrections is the side drama of these speculative stocks can suck you in to staying fully invested and then a big 1000 plus down day on 4% breakouts traps you.
I have seen this or very similar movie before.
In fact I developed Market Monitor after twice getting caught in such topping process.
Twice after building the account by 70 to 80% in the bull phase by being excessively bullish at end I ended up giving up 20 to 30% of that profit when the market turned.
That is when I developed Market Monitor as a overall filter to tell me when to be aggressive and when to run to sidelines.
In the last 15 or 16 trading days we had a bull market which during normal market conditions would have been 3-4 months bull market.
There was no correction during the entire move.
Stocks with growth characters and future growth prospect were the leader unlike the first phase of the market where junk was making big moves.
Chinese stocks were the early leaders. They have the best financials in the market currently. They started topping out couple of days ago some like UTA, RINO, CGA continued their move. But now look vulnerable. The early leaders like CYOU, NTES, PWRD, SOHU , BIDU, have gone sideways or are churning.
Stocks in top 3% by MDT ranking are way overextended and some are showing early signs of reversals.
In last 5-6 days there has been a steady increase in number of stocks down 4% on a daily basis. In the beginning of the move they were in double digits, now they are in triple digits daily.
So if you look carefully there are signs of distribution and selling in to strength.
My personal objective here is to protect profits made last month. That over rides all other convictions. I am ready to go to full cash if I see further weakness.
Once i figure out the nature of correction, I can always get fully invested in a jiffy.
As of now if you want to play the market, your best bet is short term day trades.
But I will still be looking for quality Episodic Pivots with outstanding earnings and catalyst and will still put money to work if I find good EP.
One of the things you must mull over and think a lot about is the nature of moves in the market currently.
Market moves which take year to happen are happening in weeks.
Historically there have been periods where such behavior has happened for some years.
In such trading environment, if you are slow to recognize opportunity or market turn or trading pullback based or mean reversion kind of methods,or waiting to add to positions, you are likely to be a toast.
Market Monitor Market monitor is market breadth based market timing tool
Current Readings Market in a rally mode. Earnings season currently on
# of stocks up >4% on high volume
# of stocks down>4% on high volume
# of stocks up >25% in a quarter
# of stocks down>25% in a quarter
Approaching 200 indicates extreme bullishness Intraday readings were around 230 levels .
# of stocks up> 50% in a month
At extreme level
# of stocks down>50% in a month
# of stocks up>25% in a month
# of stocks down>25% in a month
# of stocks up>13% in 34 days
# of stocks down>13% in 34 days
% of stocks in confirmed uptrend
This is in bearish territory.
% of stocks in confirmed downtrend
10 day cumulative breadth ratio
#of stocks up> 4% in last 10 days/ #of stocks down>4% in last 10 days