Description: Stock analysis and tips that help you find the best ETFs and stocks to buy
Low Volatility Encourages Equity Exposure
The S&P 500 Index closed at 1,949.44, up 1.34% on the week. The S&P 500 Index made new all-time highs every day last week with market internals catching up to the price action of the Index. The Nasdaq Composite and the Russell 2000 Small Cap Index did even better, rising 1.86% and 2.71% respectively.
As you can see in the graphic below, the number of stocks with bullish vs. bearish Chaikin Power Gauge ratings in the three indexes featured have improved dramatically, although the Nasdaq 100 still has more bearish than bullish ratings. The market is now up 3 weeks running with 12 of 14 trading days higher. In doing so the market has gotten overbought and is ripe for a pause. There is a stronger case to buy stocks in a climate where volatility is low and this is evidenced by the VIX Index of volatility at extraordinarily low levels. This is partially a function of Federal Reserve Board policy, but a reality nonetheless.
Power Bars from Chaikin Analytics
Last week we concluded “Therefore we still remain cautious for the next 2 – 4 weeks as the likelihood of a mild pullback is high. Anything more than that, with the S&P 500 at new highs every day will have to come from an unexpected event and this is more difficult to predict.”
I reiterate that cautious outlook, recognizing that in this topsy-turvy market where European Central Bank action on Thursday which was intended to weaken the Euro had the opposite effect, the market could easily go to 2,000 on the S&P 500. More likely is a mild pullback to 1,900 – 1,920 based on current fundamentals. A more sizable correction of 5 to 10% would need to be triggered by events not known at present.
Should I Sell the High Momentum Stocks Which Have Rallied?
Yes, I still believe that there is downside risk in the high momentum stocks with bearish Power Gauge ratings which took a beating from March through May and have now rallied sharply. This is a good time to eliminate these riskier names from your portfolio as the fundamentals remain over valued and short covering has played a big part in the rallies.
Amazon (AMZN) which closed at 329.67 is an example of a high momentum stock with a bearish Chaikin Power Gauge rating. After dropping 31% from its January peak of 408 to 284, AMZN has retraced 38% of its decline, a level that often signals a reversal back to the downside. A 50% retracement which is normal market action would take Amazon to 345. The rally was sparked in the last few days by rumors of an Amazon smartphone introduction on June 18th.
(Chart from Chaikin Analytics)
ETF Sector Update
The Financial Select SPDR Sector ETF (XLF) led the market to new highs this week, along with the Industrial SPDR ETF (XLI). Only the Consumer Discretionary SPDR ETF (XLY) failed to equal or exceed its prior peak because of continued weakness in retail stocks. The stocks in the XLY and the Retail ETF (XRT) should be pruned back on the current rebound.
Portfolio Strategy in the Current Market Environment
If you heeded our cautious outlook, you have raised cash which can be put to work on market pullbacks. Continue to eliminate high momentum/high risk stocks with bearish Power Gauge ratings while awaiting a pullback to put cash to work in the more conservative stocks like Caterpillar (CAT), Microsoft (MSFT) and ConocoPhillips (COP) which have led the market higher.