Are the markets showing fatigue?

The old adage that a picture is worth a thousand words… charts/pictures are essential when it comes to tracking the markets relative to the broad indexes. The chart below is the S&P 500 index which clearly shows the big test lower that started on September 18th and reversed on October 15th to retest and exceed the highs of September 18th all in a period of seven weeks. It is equally important to note the length of the daily bars on the charts got longer as the index approached the lows of October 15th showing greater speculation or acceleration from investors as the losses got larger. The buyers who were willing to step in initially believing stocks were a value at those levels produced daily bars equally impressive on the bounce off the lows. As we have now hit new highs notice the size of the daily bars on the chart are much smaller and condensed in size. Speculation is drying up and worries are showing up in the chart. It is easy to look back at the previous highs on the chart and see a similar process before the chart moved lower again. You can call this process overbought, extended, or whatever you like, but protecting your downside risk is paramount short term if you are trading positions (13 week or less holding periods) and even if you time horizon is short term (9 month or less holding periods) you should be addressing the risk of the assets you hold in your portfolio currently. I am not saying it is going to go down, I am not speculating or pontificating a correction, I am simply stating manage the risk of each positions in light of what is happening in the market short term.

Chart

 

The other factor of interest currently is the leadership or lack thereof in the market currently. The chart below is a scatter chart (my name) which puts the ten sectors of the S&P 500 index and plots them against the index itself. Healthcare was leading (orange) but has turned sideways of late with the biotech stocks struggling to resume their upside leadership. Industrials are leading nicely (blue), but they only account for 10.4% of the index weighting. Financials, technology and energy are the sectors we need to see a resurgence from if the index is going to maintain the upward trajectory and keep the trend moving higher. Based on what we see below we understand clearer the slowing in the chart above over the last week. Note the jumbled mess below the bold white line (index) the rotation of who is up or down has become a game of hot potato with no true leadership or movement on the upside.

SP500Scatter

 

We have to take what the market gives, but we also have to manage the risk in light of what the market does. For now the uptrend short term and micro term are pointing to the upside… however, they are leaning a bit like the Tower of Pisa. If the foundation of the market (fundamentals) are strong enough it will stand. If they are weakening, as some suspect, we have to be mindful of the potential to fall. Manage what you own, take what the market gives and take it one day at a time.