Five Reasons to Be Cautious Now

Smita Sadana  Jun 12, 2009 11:40 am

Five Reasons to Be Cautious Now
 
Looking for a mild correction -- or a dip-buying opportunity.
 

 
After a spectacular market advance, is it time to bring caution back? Here are some things to worry about:

1. Percentage of stocks above 10-day and 40-day moving averages have been steadily coming down.

And this has been true even as the major market indexes have continued their tentative advance. The percentage of stocks above their 40-day moving average has declined to 80% from 92% at the beginning of May, and the percentage of stocks above their 10-day moving average has fallen to an anemic 57% from high 80s. The negative divergence is somewhat concerning as it implies that a greater number of stocks are deteriorating even as the indexes stay close to their recent highs.


Click here to enlarge.


2. Small speculative stocks are the new momentum stocks.

Over the past few days, stocks under $10 have been running higher as though they're going out of style. Meanwhile, real momentum stocks Apple (AAPL), Google (GOOG), Amazon (AMZN) are being cast out of favor. We have looked at Goldman Sachs (GS) as one ‘tell’ among many about this rally and so far there was nothing to worry about but now GS is at the brink of breaking a significant channel. Now, this is not very drastic since there's significant support nearby, but the euphoria seems to be petering out. Leadership has become very narrow.

                             
Click here to enlarge.


3. Good news isn’t being rewarded as it used to be.

Even "less-bad" news received more accolades earlier. Qualcomm (QCOM), Texas Instruments (TXN), and Home Depot (HD) which sparked the market higher, themselves closed in the red yesterday.
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Comments (7) See All Comments »
06-12-2009, 11:58 am
Czar inflation raging.... when is the last time even 1 Czar did anything right.

The administration vowing to level the players... leveling the playing field isn't a goal nowadays.

More public debt.. great way to cure a
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06-12-2009, 12:08 pm
Great comments Smita.

I would also add the slowdown in the Chinese domestic economy which has fueled a lot of this move through the commodities as well as rising bond yields as potential correction catalyst.
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06-12-2009, 12:23 pm
Hi, let me qualify buy saying I have puts. Maybe I'm seeing what I want to see on the QQQQ. Looking at the QQQQ daily It looks like its rounding over, it looks like the beginning of a chart pattern that was powerful after the tech crash we call
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06-12-2009, 1:04 pm
Professor S, Measured and well-reasoned, thanks.

The lack of participation by IYR for some weeks got weird lately, with the IYR solidly down on up tapes and up (like today) on down tapes.

Do you have any insight on this rec
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06-12-2009, 4:21 pm
Thomas,

I suspect it could be to do with their respectve holdings, but I really haven't analyzed it thoughly. Maybe I should spend somw time with IYR and XHB this weekend :-)

-Smita
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