The Stock Market's Advance Narrows
"For a day where the S&P was essentially flat, there was a lot going on beneath the surface.
Just a few days ago, everyone was so excited about the rally, but I pointed out that the cumulative advance/decline line (breadth) had not made a higher high. You can see the updated chart that shows a retreat back to early June levels.
Here's what needs to be watched, though: the cumulative volume. It is on the verge of making a new low on the year. So regardless of what the indexes are doing, the majority of the volume this year has been on the downside, not the upside.
I have noted the increasing number of stocks making new lows on the NYSE. On Wednesday that increased again, this time to levels not seen since Dec. 1, when the S&P was trading down around 2200."
--Divine Ms. M (Helene Meisler), "Here's What We Should Be Watching"
The prime feature of Wednesday's trading was the increased narrowness of the market advance -- cumulative advance/decline line deteriorating, lower volume and rising number of new NYSE lows. (See Divine's charts and verbiage above.)
Let's remember Bob Farrell's Ten Rules of Investing , especially this one:
Rule #7: Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
Let's start by stating the obvious.
Value, financials, retail and energy-related issues lagged while biotech, big pharma and growth (technology) ran. This diminished participation is normally market-unfriendly but in a backdrop of dominant strategies that worship at the altar of price momentum, that relationship becomes less certain.
Jim "El Capitan" Cramer captured the value-growth conflict in " This is No Country For Old Value." Here, RevShark describes the rotational nature of the market in yesterday's action.
Ironically, a renewed stock pickers' market is now occurring at the apex of Passive Investing's popularity, questioning whether we might be seeing peak passive investing.
Finally, I continue to see a rising probability that the bad market will drown out the good market in the weeks and months ahead.
Here are some other important observations from yesterday:
* Tweet, Tweet! This week's "Trade of the Week" -- long Twitter (TWTR) -- rose for the second day in a row (up 5%), extending its gains to about 8% since mentioned on Monday. The shares reclaimed their 200-day moving average. Aiding the recovery were positive comments by Cleveland Research, which stated that it is garnering more constructive feedback on the company's strategy and execution of live content. In the struggle for media dollars with Facebook (FB) , Alphabet (GOOGL) , Snap (SNAP) and others, the company's lower costs are aiding return on investment. Cleveland Research boldly wrote that their Twitter optimism is higher than at any time in the last two to three years.
* Allergan's Big Rally Continued: Shares of Allergan (AGN) were up by another $5+ in yesterday's trading. It appears $250 has been formidable resistance in the past, so let's watch closely the near-term price action. Despite reducing to medium in size on Tuesday, Allergan remains my favorite large-cap stock for 2017.
On the day, iShares Nasdaq Biotechnology ETF (IBB) was up a strong 12 points, led by Celgene (CELG) , Gilead Sciences (GILD) and Allergan.
* Junk Gets Junkier: I have been laser-focused on the high-yield market, which has shown signs of rolling over. Yesterday, in part because of crude's fall, iShares iBoxx High Yield Corporate Bond ETF (HYG) fell to $87.60 (below $88.25 support).
Though the short-term trend is obviously negative, I continue to see long-term value in energy stocks and I am a scale buyer of Energy Select Sector SPDR (XLE) which I hope to own for years. I am now looking at Schlumberger (SLB) (Barclays downgraded it yesterday) and Exxon Mobil (XOM) as potential purchases.
* Financials Foundered: On Tuesday I re-established shorts in Morgan Stanley (MS) , Goldman Sachs (GS) , MetLife (MET) and Lincoln National (LNC) . The stocks fell $0.80, $3, $1 and $2 respectively on Wednesday. A good day. Banks also fell as the yield curve continued to flatten and bond yields fell.
Stress test results for the large banks are out after the close today.
* Bond Yields Continued to Fall: Economic data continues to disappoint, a key part of my ursine market view. We should listen to the bond market's message.
A special thanks to Chris "Not The Designer" Versace whose columns were terrifically value-added. (I especially enjoyed his Costco COST analysis)
As I was yesterday and will be today and tomorrow, I will be on the road, so my posts will be short and, hopefully, sweet!