As Market Technicians, we don't like catching falling knives. Today we want to reiterate several areas of the market that we either want to stay away from completely or even be shorting if you're into that sort of thing.
Plus we'll add a new index sector to our watchlist that's in danger of becoming a "falling knife" of its own.
Here's the leader of the weakest stocks, Nifty PSU Banks, breaking down to new all-time lows on an absolute basis. When bullish momentum divergences fail to spark any sort of upside traction, that shows that sellers are remaining aggressive even at lower prices and that the downtrend remains firmly intact. If prices are below their recent lows of 1,220 then we're looking for further downside towards 1,010.
Gold (GLD) broke out of a multi-year base last year and has more or less been trending higher since. No new news there.
But as JC explained in a post last week, Gold Miners (GDX) have finally broken out of a 7-year base as well after recently taking out resistance at key prior highs.
Today we're going to take a deeper look at the space.
We love setups like the one in Gold Miners right now. Not only did GDX resolve higher from a massive base but there is also a hefty amount of price memory at the breakout level which should act as solid support going forward.
Jeff deGraaf is one of those analysts who influenced me very early on. Something I've always admired about him is how much emphasis he puts on first identifying what type of market environment we're in, before then giving more or less weight to different tools and indicators. This is one of those important steps that I think gets forgotten quite often when you see investors trying to always incorporate a certain strategy or approach regardless of the environment. In this episode, Jeff compares this stock market crash, and subsequent recovery, to others in the past including 1987. He does a nice job of incorporating what is currently taking place in Bonds and Gold into his analysis for stocks. I think there are a lot of great lessons in this conversation with, who I believe, is one of the best Technical Analysts in the world today.
Let's take a look at what's going on in the major asset classes.
Let's start with Bonds. Here's the US 10-Year Note Futures printing their highest monthly close in history, clearly in an uptrend. The Bond market remains in an uptrend both in the US and most markets around the globe.
Every weekend we publish performance tables for a variety of different asset classes and categories along with commentary on each.
This week we're highlighting the underperformance from the US using our Global Index and International ETF tables.
Click table to enlarge view.
Despite the Wilshire 5000 (DWC) closing slightly higher on the week, all major Large-Cap averages in the US closed lower. While equities sold off across the board to end the week, the Eurozone still managed to book a nice gain with the German Dax (DAXX) and Stoxx 50 (STOXX) up 4-5% each in what was a short week for much of the region.
The Nikkei 225 (NI) and Shanghai Composite (SSEC) each closed almost 2% higher in what was also a short week for much of Asia.
Weekends are a great time to take a step back and rip through thousands of charts to see what's really going on. The S&P500, Dow and all those other indexes can only provide so much information. At a certain point, you need to get your hands dirty and a really look under the hood.
This weekend was especially informative because we got new Monthly Charts on Thursday and new Weekly Charts on Friday. That's like Christmas for me.
Today I want to go over a few of the most important charts we want to keep an eye on going into the "Sell in May and Go Away" period.
Now that April is in the books that old Wall Street adage of “Sell in May and Go Away” is making its annual tour around the world of financial media. The reason this is such a commonly rehearsed phrase this time of year is that it was one of many seasonality trends first introduced by Yale Hirsch in his book, The Stock Traders Almanac.
The theory is rooted in historical research which shows that stocks tend to experience their worst performance between the months of May and October. Alternatively, the best months of the year typically occur between November and April, which is what we're going to cover in this post.
Notice how significant the disparity in average return is between these two six month timeframes.
The best part about the end of the month is that there's always a fresh batch of Monthly Charts waiting for us. We only perform this exercise once the candlesticks are completed, which in this case was Thursday April 30th. It takes me about half an hour to get through them all, which represents roughly 6 hours of my entire year's work. I promise you from the bottom of my heart that there is no single part of my entire process that I find more helpful than this monthly chart review.
You see, this process forces us to take a step back, and gives us no choice but to identify the direction of the primary trends. We use these to put shorter-term trends into context. So no matter what your timeframe is, I think first identifying primary trends, and then working our way down from there, is a huge advantage over a blind bottoms/up approach.
Here are the things that stood out most during my review:
There has been a lot of chatter about the outperformance from Health Care recently. One of the industry groups benefitting from this strength has certainly been Biotechs so we're going to dive into that space today and take a look under the hood.
This week's Mystery Chart is a long-term ratio chart of the Nasdaq Biotech ETF (IBB) relative to the Nasdaq 100 (QQQ). Thanks to everyone for participating. Responses were pretty mixed this week as the chart is at a bit of an inflection point as it tries to hammer out a bottom at key prior lows from 2007-08 and 2011.
Since most of our upside risk management levels have been broken, our broader short thesis is no longer valid. The short-term momentum remains to the upside, so let's talk about what sectors will benefit and the next logical target for the major indexes.
Chris Ciovacco is someone whose work I've followed for many years. His approach to markets is similar to mine, in that he incorporates a weight-of-the-evidence technical strategy. His open-mindedness and ability to set up multiple outcomes to prepare for, is one to be admired. In this episode, Chris walks through his thought process when analyzing the current environment. He makes a great comparison to early 2009 and asks whether we're in January '09, just before another severe decline in stocks, or in May, on the way up after already bottoming.
