April 2, 2013

Logical Market Update: RUT 2000 Remains Weak Link – DJIA, S&P 500 Push to New Highs – Correction Likely Soon

Russell 2000 Remains Weak Link as the DJIA and S&P 500 make additional New Highs.  Volumes are again Light – Complacency is High- Volatility is smashed to New Lows – Another Correction Likely Soon.


I’ve said it before and I’ll say it again – it only gets more confusing and difficult going forward.  There may be extended periods of total amazement as one index plunges (as the Russell 2000 did on Monday) while the other two seemingly operate in a world of their own.  The Russell did gap higher on Tuesday morning and then failed strongly when compared to the Dow and the S&P which pushed to additional new highs.  So it appears that it is the Russell 2000 that is becoming the leading indicator for short and possibly long term direction. 


On a percentage basis the Russell has risen over 32.5% as compared to the DJIA at 16.5% and the S&P at 14.5%.  Let’s continue to gather some data:  all three indexes are within extreme overbought readings on the weekly and monthly charts.  All three indexes have seen volumes slip as prices continue deeper into record territory.  The Russell has lead in percentage terms during both rallies and declines and is often the first index to either turn higher or lower.  Add to all of the above that volatility has been crushed and pushed to additional all time lows as algorithmic trading continues to dominate trade.  Complacency also remains high as investors and traders alike adopt an “all is well” attitude.  Inflation along with interest rates has been artificially held lower to combat any threats of dipping back into recession. 

^SP500 (Weekly) _ ^RUT (Weekly) _ ^DJIA (Weekly)  12_2012 - 14_2013


So why have the markets continued to push higher against an ever increasing “pot” odds that favor a decline.  Even though I still do not feel that we have seen the highs in the Russell 2000, the S&P 500 or the DJIA, I believe that we are headed for another “slap down” type correction to remove the excess and to bring back some reality to the markets.  Again, it is during these periods that balance is restored and stronger momentum to move to additional new highs is achieved. 


To answer the initial question above – the markets have extended higher as some strong sector rotation takes place.  With the main stream media focused mainly on high tech, IPO’s, the FED and the financial sector it appears that the latest rotation out of technology, precious metals and treasuries has had funds moving money into biotechnology and biopharmaceuticals pushing several indexes to the stars and beyond.





Sector Rotation

Sector rotation is a common occurrence within the various markets and often goes unnoticed.  The current rotation into the biotechnology and biopharmaceutical sectors has been in play since the Affordable Health Care Act became law as analysts were able to get a better understanding of what will benefit and what will not once it is fully implemented.  But as with most advances within the markets nothing goes up (or down) forever and this particular rotation appears to be ending in true parabolic fashion.  It is at times like this that it is good to remember the advice that many traders learn the hard way – Don’t be late to the party, as it then often becomes a game of musical chairs and in this game when the music stops it can be extremely costly. You can see the extreme nature of this sector rotation as it pertains to each of the larger indexes discussed.  The charts below make the point very clear. 


The DJIA is in blue while the Dow Jones Biotech Index is in white.  Check out the parabolic nature of the Biotech index that began in late February 2013 and then steeper yet from mid-March to now. 



The S&P 500 (blue) and the S&P 500 Biotech (white) again the parabolic nature from mid March is staggering.




The Russell 2000 (green) and the Russell 2000 Growth Biotech (white)


Interesting to note is that the parabolic nature of the Russell 2000 Biotech index took place in July to October 2012 with a crash like move forming a bottom in mid November.  From that point the two indexes have moved more in lock step with one another, with both turning sharply lower straight off of all time highs this week.


The “pot odds” continue to favor the equity markets heading lower.  So continue to keep in mind the words of a wise old trader – don’t let your emotions rule how you initiate a trade – either as a buyer or a seller.


Day trading vs. Position Trading:


The markets will continue to whip around before the final tops are put in.  Sector rotations will continue as will algorithmic trading.  Many of the “old rules” of trading have not benefited market players much and I am a huge advocate that the Conventional Wisdom style of trading will only lead to eventual bankruptcy.  The status quo is changing – make no mistake – and there is no turning back.  The patterns in play will complete and the next phase as much as we as human being believe we can control things will roll over many as it corrects over 100 years of advance.

This is where using a dependable trading system; such as the DTS system will benefit a trader’s P&L.  So much so that I am including the discussion again:


Diversified Trading Systems (DTS) – Trading with the Birds:


 As a technical analyst with many years of experience I find myself going over charts throughout the trading day – but I get asked many times how to find trades without having the years of experience or knowledge that often exhausts the novice trader quickly as it strains emotions, and even the ability to see clearly.  Well, here is the good news!  You don’t have to comb over charts looking for signals or confirmations to trade with DTS.  DTS does the “combing and hunting” for you.   


DTS offers three “birds” to trade with – the Hawk Micro-Scalper, the Falcon Swing Trader, and the Eagle Trend Trader.  All are available separately and here is the really good news, you can plug several markets into each component (Hawk, Falcon, or Eagle) to cover, equities, treasuries, futures, precious metals, or forex.  With the markets seemingly spreading the action across the spectrum it is now possible to receive signals and react to them with clarity and accuracy. 


Traders should remain in play as trading opportunities on an intraday and short-term basis will continue.  Diversified Trading Systems (DTS) via its three (Hawk scalper, Falcon swing, and Eagle trend) systems remains my choice to use as it offers a complete and unique system to trade with. 



Please check back – as over the coming week(s) I will go into more detail on how I choose a market for trading as well as greater detail on good money management, position sizing, and managing your winners and losers.