Longer term, there is absolutely nothing wrong with the markets. Amazingly, we have only seen one 1% or more correction since the beginning of the year. This is serious persistence which does not happen very often. We can go on and on about what is right with the market. But…we are finally starting to see some negative divergences at this juncture which could lead to some sort of pullback. This does not mean the end of the world is at hand. Markets have to correct at some point. Pullbacks are healthy. They wipe the smiles off of the bull’s faces while emboldening the bears. It is in these pullbacks that the market sets up for higher prices.
Shorter term, we are less than thrilled with the action in the Russell 2000. While other major indices have broke to new highs, the Russell stayed a few percent below. To make matters a little bit more worrisome, the Russell broke below short term support Friday at 810. The all-important 50 day average is just below at 790. By itself, this is no big deal…but one must add in the Transports which have also underperformed. In fact, the Transports are now sitting on that same all-important 50 day average. Remember, a stock, a sector or a market cannot go up if it is trading below the 50 day…so this must be watched. We will get into what is causing weakness in the Transports later in this report.
There is also a divergence in new highs. New highs are much lower than where they were last February when the market was at these highs. This simply means fewer and fewer stocks are carrying the day.
As far as sectors go:
I have always said, “it is easiest to isolate weakness when the market is strong!’ Thus, I spend time on what is not working today. These are areas that are either topping or have completely underperformed the market during this rally. These are areas that until things change, should be avoided. If they can’t lift them in a strong market, what happens when the market weakens?
Coal stocks are a horror show. They are actually on the new low list.
Most other metals/mining areas continue to underperform. These areas include steel, aluminum, copper and anything you can drop on your foot and it hurts. Gold and silver were rallying decently until a massive sell-off occurred this past week. That was not aunt Mary and uncle Bob selling. It seems something helicopter Ben said caused the dump.
In the transports, rails remain very weak as names like CSX (CSX) and Norfolk Southern (NSC) are breaking badly. On top of that, the airlines have been croaking as higher oil prices sent them south. As soon as oil prices broke out to the upside, airlines broke to the downside.
Some areas of the semiconductors, namely the equipment makers, are now rolling over. Watch the Sox carefully.
Regardless of what is not working, most areas are. We just think they need a break. Many names and many areas are extended and due for a pullback. At least, we hope we get one as secondary buy points off support/moving averages are typically powerful. Until the major indices break below moving avergaes, they get the benefit of the doubt.
Gary Kaltbaum owns Kaltbaum Capital Management, LLC (“KCM”), an investment adviser registered with the U.S. Securities and Exchange Commission. The opinions expressed herein are those of Mr. Kaltbaum and may not reflect those of KCM. The information offered in this publication is general information that does not take into account the individual circumstances, financial situation or individual needs of an investor. The information herein has been obtained from sources believed to be reliable, but we cannot assure its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results.