-- This Week In The Money --

Analysis, Perspective, Trading Strategy

Elvis Has Left the Building

By Joe Duarte on July 30, 2018

The King of Rock n’ Roll, Elvis Presley, in a smart display of self-preservation against a potential mob scene, would always leave the arena immediately after a concert, even as the crowd cried for more and the band played on. Moreover, if news reports are correct, insiders in the FAANG stocks, much like Elvis, had already left the building even before Facebook’s bad earnings news hit the wires. Indeed insiders seem to have sold stock to the tune of $4.8 billion in the weeks following the reports of the company’s broad privacy and alleged political bias problems. So while the Elvis emulating “smart money” escaped the fleecing, what was left behind was a crowd of ETF and mutual fund bag-holders (see below) in a lurch.

Anyone who’s read this space and heeded its suggestions over the last few weeks has likely reduced their exposure to risk and avoided the FAANG stocks. And even if none of us could hope to rock like Elvis there is still time to reduce risk. Thus, anyone who wishes to trade another day may want to channel a little bit of the King and get out of the stock market arena to some degree while the getting is good. More specifically, a wide ranging review an array of price charts suggests that both the FAANG stocks and the overall stock market may be at a point where “Elvis has left the building” and the souvenirs are sold out, at least for a while.

On July 22, in this space I wrote: “We may be witnessing a change in the programming for trading algorithms. And if that is indeed happening, this market may be headed for some trouble.” And what I saw this past week did nothing to change my mind. In fact, if I didn’t have a well hedged portfolio at the moment, I’d be downright bearish.

NYAD May be Stalling

Despite booming earnings and signs of a strong economy, the New York Stock Exchange Advance Decline line (NYAD) mostly went nowhere on the week which ended on July 27. This is important for two reasons. First, NYAD has been the most accurate indicator of the stock market’s trend since the 2016 presidential election. And second, the Bollinger Bands around NYAD are starting to shrink, a sign that a big move in the stock market lies ahead.

In fact, a look at the NYAD’s action last August suggests that similar circumstances lie ahead. Consider the flattening out of the line in the July-August period last year which was followed by a rolling over of prices for a difficult and scary two weeks. Compare the RSI and the ROC for NYAD during that period to the present and what stands out is that both indicators seem weaker this year than last year.

An examination of the chart for the S & P 500 (SPX) during the same period shows that August 2017 contained a 60 point downdraft for SPX which included a 32 point single day drop in the index on August 17. In the current market, just a normal correction within an ongoing up trend could take SPX back below 2700 (4%).

Of course a 4% drop in SPX is relatively small in comparison to a 20% drop in Facebook (NSDQ: FB) or a nearly 5% drop in Intel (NSDQ: INTC) in a single day. But consider the fact that if the market truly hits the skids in the next couple of weeks, the Nasdaq 100 Index (NDX) has long term support at, 6727, its 200-day moving average. That’s roughly 569 points (7.8%) below the July 27 closing price.

Not surprisingly the current culprits for the market’s woes are the FAANG stocks (Facebook, Amazon.com, Apple, Netflix, and Google parent Alphabet). These five stocks are responsible for most of the gains in NDX and to a great extent those in SPX for the year. Moreover, a look at the BMO Rex Microsector FANG Index ETN (NYSE: FNGU) tells a woeful tale of caution as Accumulation Distribution (ADI), On Balance Volume (OBV) and the Rate of Change (ROC) indicators suggest that not only have sellers been slowly sneaking out of these stocks, but that more pain may lie ahead for.

Ultimately, if this August is similar to last August and given the FAANG stocks’ heavy weighting in both SPX and NDX, any further declines could be bigger and faster than what we saw last year. Furthermore, when you add the unpredictable effect on the market of algo trading based on headlines and the fact that the Federal Reserve is hell-bent on raising interest rates, life could get very interesting in a hurry.

Elvis Was Onto Something

For weeks I’ve noted that there would be a day when 1.5 plus percent with almost no risk in a money market fund would become attractive in comparison to watching the algos take your money. It is now possible that we have reached the point where critical mass has been reached and the increasing number of investors heading for the exits will start to weigh more significantly on stock prices in the short and perhaps the intermediate term.

Still, in this crazy market, the algos may wish to make us all look foolish yet again. Thus, even though stocks should at least correct for a few weeks, we may get yet another rally to new highs.

Stay hedged. Stay patient. Trade in small lots if you must trade at all. And above all, consider the possibility, that like Elvis, it may be a good time to leave the building even as the band continues to play and the crowd is chanting for more.

 

















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