Stop, Look, and Listen

The sell-off today and last Tuesday deserves close attention. We believe for a number of reasons that we are at a “Stop Look and Listen” point in the market.

What I mean by this is that we are at a higher probability point where the market will begin to pull back. For now I project this to be somewhat brief; in the 4% to 5% range. There may be a lot of choppiness as this occurs and could possibly be something more significant and only time will tell.

Bottom-line, I do not believe there is good reward-to-risk to commit going heavily long at these levels and it is prudent to be watchful and suspicious of short term attempts to rally.

Be wary if this rally is short-lived

In order to have more confidence that an intermediate top in the market has been reached, we need to examine a congruence of factors which we will cover in this report. I have enclosed a chart with notes following the analysis.

31% of a of leadership group watch list is in the process of pulling back 10% or more and we are seeing some meaningful resistance in key names. Some serious cracks are showing up. When I see a significant percentage of the overall leadership group begin to correct in excess of 10%, I feel it is indicative of a stock market starting to roll over.

Distribution days continue to show up on both indexes and this is a concern. Accordingly combined with action in some of the leaders, Investors Business Daily changed the Market View to “Market Under Pressure”. The overall stock market has risen over the last 7 weeks on tighter price spreads and lower volume than at any other time since the 2009 low. We appear to be running into resistance and selling supply. In addition, we have run into an upper channel line on the S&P. 1219 also would represent another significant resistance area for the S&P500 index.

"Under Pressure"

The major indexes have run up from the 2009 low to levels rarely seen in market history without any significant pull back. The markets have reached a 62% retracement from the March 2009 low. 62% is a significant Fibonacci retracement level for the S&P 500 index, which confirms the 1208 to 1220 resistance area and a possible turning point. It would not be surprising to see a major effort to try and get the market higher than 1220 to trigger a “fake out” technical short covering and some further upside before any kind of serious correction.

We are not seeing any flight to safety which would be another sign to watch for a possible market top. By this I mean when we see investors flock to large value stocks for safety that are the usual safe havens in Consumer Staples, Utilities and healthcare. We have yet to see a prior week with these groups leading overall sector performance.

Our Breadth internal indicator tools (which go back to 2000) are not showing any serious deterioration below 1.06 areas for advance declines. This would tend to make us more bearish in the short run and confirm a more significant market top.