Last weekend I mentioned that the stock market was undergoing rotation, however, no real fear was associated with the selling. This week we have a market that looks like it may have started some broad based selling, but again without much fear from market participants. During the week most of the indicators that I follow strengthened. Then came Friday, which showed an entirely different character than I’ve seen in a long time. It reversed the gains in our internal indicators and also created some concerning chart patterns in individual stocks.
As you know, I try to give a few things each week to watch as the most important clue to the direction of the market. This week what I’ll be watching most closely is the action of the stocks that had held up while momentum, bio tech, and social media stocks were being ravaged by selling. On Friday, many of these stocks were sold aggressively along with stocks that have been weak since the first of March.
Google (GOOG) is a good example of a currently weak chart pattern that is being repeated in many of the stocks that had strong runs during 2013. It drifted back to its 50 day moving average, then broke down sharply. The subsequent rally came back and touched the 50dma then had a hard failure. For a few more examples look at FB, YELP, and PCLN…or your favorite momentum stock.
During the March swoon, large cap “value” stocks held up and were being bought. On Friday that changed. Microsoft (MSFT) is an example of the damage that can be done in just one day when rotation stops. Some other examples are ORCL, QCOM, and INTC.
There are stocks that were bought during March and are holding gains at the moment, but should be watched carefully. If they start to break down it will be very dangerous for the market. Energy and select financial stocks fit in this category. Exxon Mobile (XOM) fits this criteria. Other stocks to watch are WFC and BAC.
Then comes the weakness in my old stand by stocks. Visa (V) is the best…or worst, example of how they’re breaking down. But MA, KORS, and CMG are painting some ugly chart patterns too. Disney (DIS) could be breaking down too. After looking at all the charts you can see there is some broad based selling starting that should be watched carefully.
Another thing to watch is what happens to the more defensive stocks like Consumer Staples and Health Care (ex bio tech of course). If they hold up better on a relative basis it will provide warning that a rotation to safety is under way. Proctor and Gamble (PG), PFE, JNJ, and WMT are examples.
Bottom line, the character of the market may be changing from a broad based rally in 2013, to selling of momentum in the first quarter of 2014, to broad based selling in the coming quarter. The jury is still out, but watching individual stocks should provide all the warning necessary of a more serious decline ahead.