It’s hard for me to make a bearish case for stocks with the Consumer Discretionary sector breaking out on both an absolute and relative basis. In other words, the Consumer Discretionary sector index fund is not only coming out of a 5-month base to new all-time highs, but relative to the S&P500, Discretionaries are coming out of a 30-month base to make new all-time relative highs. This is tough to ignore.

In early May, I pointed out that the Consumer Discretionary vs Consumer Staples ratio making new all-time highs was sector rotation suggesting higher stock prices in general. Since then the S&P500 is up 5.5%, the Small-cap Russell2000 is up 7.6% and the Nasdaq100 is up 7.8%. This sort of behavior is consistent with an environment where the riskier, more speculative, much higher beta Discretionary stocks are outperforming the safer, less risky and much lower beta Staples.  [Read more…]

Remember that Bearish Island Reversal in the Nasdaq in March? I wrote a whole note about it pointing out that it was now going to be a problem. The fact that the Nasdaq broke out to new all-time highs, and then failed hard, was evidence of an overwhelming amount of supply for stocks relative to demand.

I mentioned at the time that it was most likely going to resolve through time, rather than through a severe downside correction in price. The reason was that this was just a brief 2-month breakout and not a massive top or reversal. I said that the sooner we can get through that 7000 level, the stronger the market we’re in from an intermediate-term perspective. Not only was this a risk management tool, but also as a source of information: strength or weakness in this case.

Fast forward just 10 weeks later and we’re now breaking out above key resistance once again. [Read more…]