Choppy is the simplest and most accurate way to describe the current state of the U.S. equity market. But choppy ultimately leads to a resolution in one direction or the other, which is to say that patience shall be rewarded.
From the dozens of traders, analysts and fund managers that I speak to every day, the biggest challenge is remaining patient and waiting for a valid signal to arrive before making a call in the market. Whether the signal is fundamental or technical in nature, or even comes from astrology, is fairly irrelevant. If the trader has a system that should work, but he or she routinely fails to remain patient until a valid signal flashes, then it will be nearly impossible to see consistent profits over time.
The current sideways action may be trying, but a little patience will go a long way. With that in mind, let’s turn to the charts to understand where we are and what the next direction may be.
Three trading days are left until the end of the first quarter of 2014. This means that quarter end games are being played by fund managers, some of which include selling winning positions and taking profits in high-flying stocks. This is one of the reasons we have seen some social media and biotech stocks take a dive recently.
These games usually end a few days before the end of the quarter, and as such, I would not be surprised if we see a resolution to this tight and choppy trading range at some point in the next three days, and if not, then in the first trading days of April.
On Wednesday, Treasuries were up while most other assets closed lower on the day, including gold. The all-important U.S. dollar stayed unchanged and unfazed. More specifically in stocks, we saw significant underperformance by the small caps via the Russell 2000, and once again, the relative outperformance by the mega caps of the Dow Jones Industrial Average.
It shouldn’t be any great surprise that the Dow is outperforming other indices here. I mean, have you seen the charts of Johnson & Johnson (JNJ), IBM (IBM), DuPont (DD), or even Procter & Gamble (PG) lately? Well, none of them are bad. In fact, most have either already broken higher or are about to. As such, it looks to be only a matter of time until the Dow can break past 16,500 and to at least one more higher high in this current cyclical bull market.
The Russell 2000 took it on the chin on Wednesday and marginally broke below its first support line, namely the 50-day moving average (yellow line). This mean-reversion move has happened many times over the past year and a half, so the next support is the rising 100-day moving average (blue line), currently near 1,146. Until the Russell 2000 begins to underperform the Dow for more than a few days, I cannot call for the end of this cyclical bull market.
While financials also took a hit, looking at the chart of the KBW Bank Index (BKX), so far the move is simply a retest of its breakout from last week.
For my part, I am more cautiously positioned as of late with more or less a market neutral position. But that is a function of adjusting to a choppy market where we are forced to tighten our net exposure, as well as our stops. Until I get better signals from the bond, commodity and equity markets, I am still a better buyer lower, at least from a trading perspective.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.