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Market Lab Report - Premarket Pulse 8/18/17

Major averages sold off hard on higher volume closing at the lows of their trading ranges. Both the S&P 500 and NASDAQ Composite sit squarely below their 50-day moving averages.

Fears about global recession and whether Trump can get his pro-economic agenda through Congress are back on the table. We spoke of the market using the situation with North Korea as a possible alibi for selling since the economic backdrop remains tenuous at best. Singularly, the Fed's minutes exposed their concerns about low inflation, whether they can hike rates again this year, and delays on shrinking their balance sheet. This all suggests economic issues may have worsened. Certainly, the number of leading stocks has been diminishing and our focus list has been sharply contracting, a warning sign for potentially a deeper correction ahead than we have seen so far this year. So far, that possibility is materializing.

The Hindenburg Omen fired in the last 5 out of 6 sessions. While the signal has a poor track record when firing once or twice, clusters have better accuracy. While not at all foolproof especially in this QE market, the last time the S&P 500 had 5 tightly clustered signals was in late 2007 and in early 2000, just weeks before the start of major corrections which ended in market crashes. It fires when the number of securities that form new 52-week highs and lows are both greater than 2.2% of the total number of issues that trade on the NYSE (for that specific day). This bifurcation suggests the market is becoming unsure of the market's future direction as a tug-o-war ensues. Of course, this is a QE-manipulated market where central banks are the major shareholders in some of the largest cap companies. This makes this environment unique if we go by how many indicators no longer work in this artificially manipulated environment. That said, it would be best to see this omen as another indication of deteriorating market internals. Perhaps the market bubble's skin is thinning?

Focus List Notes:

Yesterday's sharp market sell-off has further weakened the few stocks remaining on the list. We would note that the list had declined to six names two weeks ago, providing a clue with respect to the weakening nature of the current market rally.

BABA gapped up after earnings but had difficulty in setting a firm low on the day. It finally ended up closing near the lows of its intraday trading range, but above the 163.51 intraday low. This could be considered buyable as a BGU, using the 163.51 price level as a very tight, and very necessary selling guide given the state of the general market currently.

NFLX is knocking at the door of its 50-dma, and a breach of the line would morph the stock into a short-sale target. On the flip side, if the stock can hold the 50-dma, then it would be in a lower-risk entry position with the idea of using the 50-dma as a tight selling guide. The stock, however, appears somewhat impaired at this stage and it is not likely to recover in a continued general market sell-off.

 Short-Sale Notes: TSLA has moved back to the downside as tests its 50-dma. The stock is up slightly this morning on news that they, along with GE, will install solar panels on 50 Home Depot (HD) stores. A clean breach of the 50-dma would confirm the stock as a short-sale, although it has already been shortable up near the 170 resistance level per our prior notes on the stock.

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