On March 22, almost a month ago, we discussed scenarios for the direction of the market, specifically the Dow Jones in the weeks to follow. At the time, the market was at maximum fear and volatility measures were spiking to all time highs.
Because of the climatic nature of the sell off at the time, there were some early clues given of an end to that leg of the decline. Remember, the Dow Jones had fallen from over 29, 600 to just above 18,200 in barely a month of frenzied selling for a loss of 11,400 points or 38%, coincidently a fibonacci number. From that point we posited some scenarios which could follow.
Again using standard fibonacci extrapolations we created signposts for levels of the (presumed) market recovery. Accordingly, we expected some pauses at the 38%, 50% and 62% levels on any bounce. These areas are not final targets, they are simply areas in which to adjust or refine entry or exits for trades undertaken. After a brief pause at the 38% area, the Dow has managed to eke its way back to vacillate over the past month at the 50% area depicted in the March posting.
While the Dow did broach the 50% area, it is still not yet able to reach the 62% area. Of course this is still possible, but the scenario projected in the March article is still in play and so we protect positions accordingly. As we’ve noted in commentaries on relative strength, the Nasdaq market has been the strongest of the major indices and a couple of big winners there are also represented in the Dow Jones, namely, AAPL and MSFT. Technology stocks continue to be the most impressive on this rally even as big cap names such as BA and XOM continue to drag.
Since our scenario is still in play, we will look at those charts that have poor relative strength and either sell them or take speculative short positions on them. Referring only to Dow stocks, the finance sector still has not looked ready to recover and the economic background supports this. Thus, AXP, GS, JPM and TRV continue to be suspect. There would have to be a significant change in the advance decline statistics of those issues to justify owning them.
If the market enters the next down-leg, then all issues of course will underperform, but even in down markets, there will be gainers. At this time, technology stocks are still being accumulated and accordingly, we’d be looking at stocks such as CSCO, MSFT and AAPL to continue their relative outperformance. Drilling down into their sectors will reveal other, even stronger relative strength issues.
While the Dow is indicative, there is an entire industry group now at the forefront of consumer expenditure and which have gone undetected by the public. We are familiar with AMZN of course but the virtual commerce industry has new names such as SHOP, W, SQ, JD, ZM and ETSY leading the charge. Many of these are at all time highs. Unless something changes in the world of e-commerce, these issues will continue to grow and should be bought on market weakness. We are likely witnessing a rotation of market leaders.