Pullback at work | stockbee

10/02/2012

Pullback at work

Markets have struggled in last two weeks after making a choppy 15% move from June low. The move from June low was characterized by many choppy phases. 3 to 4 days rally was followed by 3 to 4 days pullbacks. There were not many back to back 5 days plus up moves.

The market was expecting the Fed decision. The Fed did not disappoint the markets. But after the Fed decision market has struggled. With a powerful catalyst what happens after the news is important. It indicates how the market views the strength of the catalyst. Instead of rallying the market has pulled back. That indicates the market views that Fed decision may not be major game changer.


In last 8 days we have had 4 distribution days on the Stockbee Market Monitor. There was 1 day of stalemate where buying and selling pressure was equal and 3 days of modest buying. The Market Monitor is a market breadth indicator which tells you about underlying buying and selling pressure and it allows you to time the markets. Prior to this pullback it was indicating extremely positive breadth and probability of a pullback. The markets have acted as per the script.



The Market Monitor signal is very useful for 401K investments. It allows you to get invested at right time and get out of the market at right time. During this bull move the Stockbee 401k lemonade strategy got fully invested on 2nd July and stayed in this move till 21st September 2012. The strategy locked in 20% profit during the move and currently is in cash. In all funds option the strategy locked in 56% returns.

What next for the markets? To resume a rally from this level we will need to see a big breadth thrust. Absent that watch carefully for breakouts and new high failure. During such transition periods the breakouts often fail immediately and new high get faded. You will see that dynamics at work. Eventually if this pullback has to work we will see sector rotation. New sectors will start breaking out and take on leadership. As of now the current leaders of this rally are witnessing slow deterioration.

Next week onward the earnings season will officially kick in with Alcoa being the first large cap to come out with earnings on October 9th. Earnings trends and guidance  will be key factor in deciding the fate of this rally. 

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