Every day, I wake up and decide how to best use my time.
Should I be looking for stocks to buy?
Should I be spending more time finding stocks to sell?
Or should I be allocating capital to entirely different assets?
That’s what we do here at TrendLabs — identify the type of market environment we’re in, and then decide which tools and strategies fit that environment best.
It’s never an “all clear” to buy or sell. This is a weight-of-the-evidence process. We gather the data, assess the setup, and then attack.
Today we’re breaking it down into three parts: what’s good about the current stock market regime, what’s bad about it, and what’s just plain ugly.
Still a Secular Bull Market
It always comes back to time horizon, right?
Maybe you’re a short-term swing trader. Maybe you’re a long-term investor. Maybe you’re somewhere in between.
What we do know for sure is that asset prices trend — and the longer your timeframe, the more important that trend becomes. (If you missed it, go read my post on timeframes from last month.)
Right now, the most bullish data on the board is that long-term trends remain firmly intact across stock markets around the world — not just in the U.S.
This is the good: The S&P500, Dow Jones Industrial Average, Nasdaq100 and Russell 2000 Small-cap Indexes all finished October with their highest monthly closes on record.
Europe, Japan, China, Latin America, and London all went out at new highs for the cycle as well.
This isn’t just a U.S. bull market. It’s a bull market for Earthlings.
The Traffic Jam Continues
Back in early October, we talked about what this market correction should feel like — and the traffic jam analogy still fits perfectly.
This is the bad part of the current environment: There’s simply more supply than demand for stocks at these levels.
In other words, there are still plenty of investors looking to sell into strength, no matter how strong the longer-term trend remains.
The best example of this continues to be the Russell 2000:
This chart of the small-cap index remains the cleanest visual of overhead supply in today’s market — and it’s also one of the most important gauges of market breadth we have.
Remember what we discussed on Sunday: If the Russell 2000 is in an uptrend, you probably don’t have a breadth problem. (If you missed it, here’s Not Weak Breadth, Just Sour Grapes.)
As we’ve discussed, the percentage of stocks on the NYSE that are above their 200-day moving average (in other words, in uptrends), peaked back on September 11. (See Here’s Why Stock Prices Will Fall.)
But keep in mind that we’ve yet to see a breakdown to new lows for this measure. So that’s one of the things on my radar for this week.
Losing the Leaders?
The good news is that the worst part about this market can easily be corrected with one day of action, AND it falls within the context of a strong uptrend.
So even the ugly here needs to be viewed within the context of the current cycle.
This is a chart of the First Trust Nasdaq-100 Equal-Weighted Index Fund (QQEW) failing to hold on to its breakout from last week.
Momentum is also putting in a bearish divergence, which doesn’t help the situation:
This index gives each of the 100 stocks an equal weighting, rather than the larger companies representing a larger percentage of the overall index, like the market-cap weighted Nasdaq-100 (QQQ).
This chart above is another classic example of the overhead supply in this market that we’ve been talking about since last month. It’s part of the congestion, or “traffic jam,” if you will.
The longer the equal-weight Nasdaq-100 (QQEW) is below 144, the longer this correction will last. Same with the Russell 2000 Index (IWM). That’s the “resistance,” as we call it.
It doesn’t mean the market is going to crash, or that we’re beginning some kind of epic bear market. It’s just the same ongoing correction that we’ve been talking about for over a month.
Some More Good News
It’s a bull market, at the end of the day.
So even though this post is mostly about the bad, the ugly, and the wave of selling pressure we’ve seen in recent weeks, the bigger picture remains the same: We’re still in a powerful uptrend, and there’s little to no evidence that it’s over.
Sector rotation is the lifeblood of a bull market. We know this — and we keep seeing it.
Healthcare was the worst sector. Then it became the best.
Energy was the worst, and now it’s heating up again — we’ve been buyers there.
And I think Transportation belongs on that same list.
Expeditors International (EXPD) yesterday had its best earnings reaction in nearly two decades, closing at new all-time highs.
That’s one of the bellwethers of the Dow Jones Transportation Average:
This doesn’t look like a top. It looks like a giant base ready to launch the next leg of the bull market.
Once this market finishes digesting the overhead supply from the past month, I think we’ll be talking about Transportation stocks leading the charge — and a lot of investors won’t be too happy about it, because they won’t own them.
We already own two of these names in our Divergence Portfolio, and my suspicion is we’ll be adding more soon.
That’s how I see the good, the bad, and the ugly in this market.
To be clear, the good is actually great.
The bad has already been bad for a month.
And the ugly? It’s ugly like a pug. Sure, it looks like it ran face-first into a wall… but it’s still kind of cute.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs