Weekends are great to just take a step back and see what is actually going on. It’s really easy to get caught up in the day to day noise. I talk about the power of Monthly Chart Reviews. This is a similar process, just done more frequently and timeframes are shorter-term. But the taking a step back part follows the same philosophy.
Here are a few things that I’m thinking about this weekend:
First of all, Utilities are one of the few sectors that made new all-time highs this week. The knee-jerk reaction to that is that we’re just seeing defensive leadership. I addressed this last week.
Here are the Utilities:
Are rising prices for Utility stocks bad for the US Stock Market? I hear some people saying yes. The data suggests NO. Higher Utilities means higher US Stocks, and vice versa. Don’t get it twisted!
And when we talk about the “Leadership” out of Utilities, while yes there has been some outperformance this year, let’s put things in perspective. These massive downtrends in relative strength are not what we consider leadership:
Also on a more bullish note, Europe just went out at new 52-week highs. Yes you read that right, EUROPE! All we read about is how bad things are in Europe. I’m thinking the market disagrees. How can things be so bad when they’re breaking out to new highs? We call those uptrends:
I think if you’re bearish equities in general, you’re making the bet that this is a massive failed breakout in Europe and things are really about to fall apart over there. I’m just not seeing the evidence pointing in that direction right now. It hasn’t been. Things can certainly change, and I like to be open minded, but Europe breaking out to new highs is not a characteristic of the type of environment where I want to be selling stocks. Quite the opposite in fact.
We talk a lot about Bullish Momentum Divergences. What I don’t think I bring up often enough is what happens when these “bullish divergences” do NOT turn into reversals in trend? In my experience it becomes evidence in itself that the trend is very strong. I think a great example of this is in Deutsche Bank right now. We have bullish momentum divergences on both Weekly and Daily timeframes. With Europe breaking out to new highs, $DB not crashing is needed for that to continue, in my opinion.
I think if $DB gets back below those late December lows, then there is likely more trouble brewing out there and this “breakout” in Europe is not that at all. We’re going to learn a lot from the resolution here.
Finally, I want to talk about the Internet Stocks, one of the clear leaders in this market. The bear case has to include Internet Stocks breaking down here. Any more tests of resistance near 148 will likely lead to another breakout, and not something that’s likely happening if stocks in general are getting killed. A break below all of this support throughout the year, let’s call it 132, is consistent with a market environment where we’re better off selling stocks, not buying them. Europe is likely falling apart in that type of market too:
That’s what I’m thinking about this weekend. What about you?