We continue to see nothing coming through our screens that meets the criteria for inclusion on the Focus List. The market action this past week continued to confirm our view that this is not a market for trend-following investors, but rather for nimble swing-traders and day-traders. Consistent, persistent trends have been almost non-existent as breadth has remained extremely weak even as the narrower indexes, such as the NASDAQ Composite and S&P 500 Indexes have made all-time highs. Note that the NASDAQ Advance-Decline peaked out three weeks ago and has been on a sharp decline since.
New highs in the major market indexes were were interrupted on Tuesday when the indexes reversed off of intraday highs on higher volume, leading to a four day sell-off while numerous areas of the market came under selling pressure. As a result, deleterious price/volume action off highs pushed the Market Direction Model (MDM) switched to a CASH/NEUTRAL signal on Thursday at the open.
Selling has been evident in most areas of the market outside of various tech areas, including big-stock NASDAQ and cloud/software names. Some of these have recently begun to weaken, with semiconductors as represented by the VanEck Vectors Semiconductor ETF (SMH) which poked its head into new-high territory on Wednesday before reversing and breaking below its 50-dma by the end of the week. The array of sector ETFs below illustrates the widespread weakness, some of which have been underperformers for several weeks now.
Short-sale targets reported on in the latter part of June, semiconductor-related names Brooks Automation (BRKS) and Western Digital (WDC) have continued to offer very playable action on the downside as they play out in surprisingly textbook fashion. In this market, undercut & rally (U&R) moves have worked more consistently as long entries that would see stocks continue back towards prior highs. The environment may be changing, however, as U&Rs in these two stocks the prior week have played out in a manner more consistent with the short side, as discussed in Short-Selling with the O'Neil Disciples (John Wiley & Sons, 2015). In that book, undercuts of prior lows in a pattern were discussed as appropriate cover points, after which a stock would typically rally into an area of overhead resistance that could then be used as a short-sale re-entry higher up in the pattern. This is precisely how BRKS and WDC have played out after posting U&Rs the prior week. BRKS posted a U&R last Thursday and then rallied into resistance along the 10-dma by Wednesday of this past week. It then broke to lower closing lows by Friday. Likewise, WDC posted a U&R the prior week, leading to a rally into logical resistance at the 50-dma and a prime short-sale re-entry opportunity. It then streaked to fresh lows on Friday.
With the short side working out in a manner that is more consistent with historical markets, this may be telling us something about the current environment. For that reason we continue to advise trend-following investors to remain on the sidelines while those oriented towards the short side can look for the short side of this market to expand if we see any further correction in the major market indexes from here.