Yesterday was a disconcerting session for a few reasons, not the least of which we saw that a guidance cut by a high visibility company certainly still has a large impact on the general market. Further, a handful of names – especially in the tech sector – that had held up reasonably well the past few weeks experienced significant weakness. This is very similar to what we saw right before the EU summit rally when a host of consumer discretionary names suddenly experienced serious weakness after being one of the last places to "hide out". We also saw almost the entire EU summit gap reversed yesterday, as the market is doing an excellent job making it very difficult on both bulls and bears.
As we look at the S&P 500 chart we can see some mild positive remaining. First, thus far the index has held the 61.8% retracement of the June 25th/26th to July 3rd rally. (purple lines below) For whatever reason, 61.8% has been the retrace that has "worked" for many of the reversal rallies the past few months. Second, we are still making a series of higher lows and (barely) higher highs off the early June bottom. For the former we had 1266 June 4th, 1309 June 25th, and thus far 1336 on this pullback. There is not much more room for error here for this path to continue – I also drew a trendline (orange) connecting the 2 former bottoms and it comes in just below current levels. That will be important to hold.
But going back to paragraph 1, we have a dearth of strong sectors – and most that are strong are in defensive areas. This does not usually bode well for continued strength. My list of sector ETFs in the equity area that are "growthy" and show strength is very narrow – essentially biotech and housing.
One of the retail ETFs (RTH) is relatively strong but that is due to a 13%+ weighting of Walmart.
Meanwhile normal areas we want to see strength from have done nothing but dead cat bounced on the Euro summit, hit resistance and rolled over. This would be places such as energy, technology, financials, industrials. Example:
What is holding up are conservative areas such as healthcare and consumer staples – but again, a market led by Walmart, Johnson & Johnson, and Philip Morris is not one where there is much risk on happening.
The dollar and bonds continue to be among the best looking charts which is a problem.
Today's "hope of the day" is of course the FOMC minutes where traders will continue to look for the constant need of new QE.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog