MLR - PMP 5/13/14

Published : May 13 2014 at 8:27 ET

Major averages rose yesterday though the lower volume suggests institutions are leaping back into the market. The S&P 500 made a new all-time closing high and is just a hair off its all time high. But while markets were up, divergences are prevalent and are generally important bearish signs that not all parts of the market engine are functioning normally. Such dysfunction usually leads to further breakdown.

During the last webinar, we mentioned divergences between the major averages before the 2007 Market Top where the Russell 2000 topped in July & the Nasdaq in October. In today's market, we see similar pronounced divergences, this time between the S&P 500 and DJIA which closed at new highs while the NASDAQ Composite and Russell 2000 are no where near their new highs. While we didn't see a climax top at the 2007 market top, today's situation may be similar as the major averages seem to be running out of gas slowly but surely as QE seems less and less effective. Compare 2009 when QE began with major averages up hugely to today's market where it seems like pushing a boulder up a hill. At any rate, markets could once again start their tiptoe trek higher past old highs, but at the same time, the prior recent times the S&P 500 hit new highs, the uptrend was short-lived.

Chinese provider of educational services, Tal Educational Services (XRS), had a pocket pivot yesterday. Institutional sponsorship increased 5 quarters in a row, earnings strongly accelerating, ROE 30.5%.

Fracking company U.S. Silica Holdings (SLCA) had a continuation pocket pivot yesterday. The stock has continued to move higher throughout the market's correction. Sales accelerating, institutional sponsorship has increased 9 quarters in a row, group rank 38.

Celgene (CELG), which was a prior short-sale target, had a bottom-fishing pocket pivot coming up through its 50-day moving average yesterday. At the very least, this takes the stock off of our radar as a short-sale candidate unless and until it breaks back below the 50-day line. The move may also be buyable on the basis of the usual pocket pivot parameters, using the 50-day line as a selling guide.

With most leading stocks deep down in their patterns, the only potential buy signals would likely be in the form of bottom-fishing pocket pivots or "shakeout-plus-N" type set-ups where N = the number of points required based on the stock's price. Thus for stocks below $50 we might use 3 points, 50-75, four points, 75-100, 5-6 points, etc. Members should keep these types of buy set-ups in mind while tracking former leading stocks that have corrected and which may be building new bases. We would emphasize, however, that despite the NYSE-based indexes moving to new highs the situation is far from clear and taking an incremental stance is probably the most prudent way to operate if one chooses to take a shot at the long side of this market.

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