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The S&P 500 is off roughly 3% from its recent highs of 1422, hitting a low of 1378 on Monday. With some notable momentum stocks holding up well, we are not dealing with classic bear market price action by any stretch. With that in mind, it is also worth noting that momentum traders seem to be circling over the same handful of stocks at this point, as the well seemingly runs dry. Indeed, the ability to reconcile a relatively unscathed longer-term uptrend with a short-term correction can often mean preserving a substantial amount of capital for disciplined swing traders, particularly when the corrections become a bit more fast and furious than what seems appropriate for an overall bull run.
Unlike on March 6th of this year, when I discussed in this video recap the fact that the entire daily price candle on the IWM (ETF for small cap-led Russell 2000) had closed below its lower Bollinger Band, this time around I am not in such a rush to look for a bottom based on that historically oversold condition. The main issue facing bulls in the short-term is that the dominate support trendline dating back to the October 2011 lows on the IWM has been soundly breached. While I expect a retrace back up to that lower Bollinger Band within the next week, I am not ruling out a dead-cat bounce before we go lower, and would not at all be surprised if that happens.
Again, this is all within the larger context of a bull run. Of course, being in an overarching uptrend is of little consolation for longs who suffer steep drawdowns during these corrections. Thus, the goal is to protect capital along the way, managing with trend with as much precision as possible. A 3% correction can easily snowball into a 7-8% pullback, which would mean the bull shakes off some of the weak hands and latecomers with great vigor.
Also keep in mind that Alcoa kicks off another earnings season tomorrow after the bell. I am not an earnings gambler, but it will be interesting to see how AA reacts to its report. Frankly, Alcoa is a poorly-managed firm that the market appears to ignore on a regular basis. That said, the stock has been the epitome of dead money since its 2009 low and may be of interest to buyers down here. The weekly chart is offering an inverse bullish head and shoulders setup, which would certainly gain credence if the stock can rally after tomorrow’s report. I am also watching the Alcoa reaction (and the reaction to the initial reaction) to see whether capital wants in on the materials, a group we have been looking for a reason to get involved with, but have not seen much actual evidence yet to do so.
Without a sector rotation, I suspect those now-crowded large cap momentum trades will soon dole out a lesson as to what and where is actually a “safe” place to put your money.
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