If you insist on thinking about the market in terms of warfare, think of high power leading stocks like AAPL, PCLN, CMG, UA as generals, colonels and captains of a vast army division. Once you see these leaders starting to tuck tail and run for cover rather than holding the line, odds are the rest of the unit is going to do the same. These stocks always seem to be the last to crack, and while we are not quite at the point of clipping through the recent lows, the deterioration in this group deserves your attention.
XLP / XLV the consumer staples and healthcare SPDR ETF are both outperforming and just off yearly highs as terrified gamblers are panic selling out of PNRA and piling into traditional ‘safe havens’ like JNJ. Even the “sure-thing” bio-tech trade got stabbed, beaten and left for dead today. If we enter a real bear, all stocks will get gutted, but for now defensive names are dug in on the high ground.
The good news is the VIX / SPX failed to breakout/down today and the big late day reversal bodes well for Friday. Recent AAII survey shows bears at a over-confident 44% reading up from the long term average of 30%. These sorts of surveys are never good for marking a turn, but it does give you an idea of which way the crowd is leaning. Keep in mind, once you hit levels near 50% in either camp, the crowd is often leaning the wrong way.
Personally, I think it is great news and a sign of strength that the SPX wasn’t down 50 points today at the lows, given the news flow. Still, the threat of another big leg down is hanging over the market like a fucking albatross. But you shouldn’t forget it is still well off the mid May lows, in spite of terrible news and what are obviously deteriorating conditions.
I believe we will see more of the same sideways, chop-to-pieces market for the next few weeks over holidays and earnings, which is most frustrating for people like me that like trends.
I still like the idea of starting small positions in OTM put credit spreads in this market for the next few weeks. Premiums are elevated and even a small rally will produce good profits. After that though, it looks like a full retreat is on deck headed into the dog days of summer.
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