MLR - PMP 7/21/14

Published : July 21 2014 at 8:17 ET

Major averages rose on Friday, reversing Thursday's losses, but volume was mixed despite options expiration. In the face of international turmoil in Portugal, Iran, Russia, Ukraine, and Gaza, the major market averages managed to finish the week off less than 1% on the S&P 500 and less than 2% on the NASDAQ Composite. Thus the resilience of the markets in this QE-centric environment continues. The Market Direction Model is likely to switch out of its short-lived cash signal sooner than later as the current sideways choppiness resolves itself.

Based on our studies going back decades, crisis events such as this week's plane crash generally only result in short-lived corrections and thus can present buying opportunities in certain leading stocks. Generally, crisis events only result in a more severe correction if the event itself has a material and broader destabilizing impact on underlying market conditions. As well, the market can correct independently of a crisis event, as it did in March and April of this year following the initial news out of the Ukraine at that time. In that particular case the event provided the market with an alibi for a initial sell-off, after which the market snapped back once the event proved to be less severe than the original market reaction implied. The market then fell into a deeper and longer correction on its own. Whether the market falls into a similar correction going forward is a more a function of how leading stocks act as we move through earnings season. At best we would consider the current action to be inconclusive, and we would avoid becoming locked into a rigid bullish or bearish stance as a QE-centric market does its best to fool the crowd at every turn, as it has done many times since 2009. The most prudent approach is to operate on the basis of what leading stocks are doing, and specifically paying attention to stops and trailing stops in long positions.

Some buy signals were flashed in leading stocks Friday:

Google (GOOGL) had a cup-with-handle breakout after announcing what was perceived as a positive earnings report despite missing by 15 cents. However, the company did beat on revenues.

Rail-related names like Union Pacific (UNP) and Trinity Industries (TRN) had pocket pivots within their bases, most likely in sympathy to Kansas City South (KSU), which had a continuation pocket pivot from a position that was slightly extended from its 10-day moving average after beating on earnings Thursday after the close. These stocks are expected to announce earnings over the next several days leading into the end of July.

Fabless semiconductor name Avago Technologies (AVGO) had a pocket pivot within its base on Friday.

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