Fund managers holding off on window dressing their portfolios for their October 31st fiscal year end are running out of time.
October option expiration is over and there are only six trading days left in the month. If fund managers have been holding off on their window dressing buys in hopes the election uncertainty would clear, are suddenly running out of options. After Wednesday's debate, the polls are tightening again and there is less clarity now than there was a week ago.
Fund managers know that energy, biotech and financials will be under pressure with a Clinton victory. With a Trump victory energy, aerospace and defense stocks could rise sharply. For portfolio managers they need to pick a winner and invest accordingly.
However, I believe they will take the safe way out and throw money at highly liquid big cap tech stocks that are unlikely to be depressed regardless of the winner. Once past the election they can quickly dump those stocks and invest based on the winner's platform. All of this indecision is artificial since it will take months past the inauguration for any changes to actually take place.
Meanwhile, the big cap techs are seeing strong inflows of cash and the rest of the market is lagging. I have a portfolio of 750+ stock symbols in my charting program. About twice a week, I scan every chart looking for potential play candidates. This weekend was very depressing.
Out of the 750 stocks there were only about 10 that had play potential. The vast majority, maybe 75% to 80%, had bearish charts. Most of the ones with mediocre or better charts had earnings over the next two weeks and that took them out of contention.
The large number of bearish charts was the biggest surprise since we are one-week into the best six-weeks of Q4. There will have to be a major shift in sentiment for the broader market to recover.
In the Option Investor commentary, I showed a chart of the Russell 3000 as evidence the broader market was fading. The Russell 1000, the 1,000 largest stocks by market cap, is showing the same pattern. There is critical support at 1,175 and the index is stuck under 100-day average at 1,187 and the 2015 resistance high at 1,190.
If I take off all the identifying marks from this chart, would you say the direction is up or down? Much of the time, our view of market direction is colored by our bias and by the commentary from the talking heads on stock TV. Does the second chart give you a different impression of direction? By removing the red and green candles, your mind focuses on the chart pattern rather than the implied motion from the red/green colors. Leigh Stevens always used bar charts rather than candlesticks for that reason.
I have used this example in the past with individual stocks and eliminated the headings and prices and the results are always amazing. If I show you a chart with Apple in the header and the prices for Apple shares, you would immediately include your bias for Apple when you are looking at the chart.
For instance, without knowing the stock on this chart, would you buy it? I cheated and added the blue support line. Without knowing the name of this stock, I would probably buy the chart because of the support line.
However, if I tell you that is the Biotech Index ($BTK) would that change your opinion? Normally, it would not but because of the current political environment, I would be reluctant to take a chance until after the election. If Clinton wins, the index is likely to move lower. Even now, all it would take is another comment about drug pricing from Clinton, Bernie Sanders or Elizabeth Warren to knock it back to the June lows. Since the biotech stocks are an integral part of the Nasdaq and the Russell 2000, those comments could tank the market at any time.
This is what fund managers are facing. They do not know what to buy so they are not buying anything or at least very little. Market volume last Monday was only 5.1 billion shares. It was not a holiday Monday or contain any specific event that would have depressed volume. Tuesday was only slightly better at 5.6 billion shares. The problem was the debate. Nobody wanted to take a position ahead of the debate in case somebody said something that tanked the market. Volume for the entire week was very low.
The S&P has failed to close above the current resistance for the last nine days. The dip below 2,120 on Oct 13th was a three month low. The rebound from that low resulted in a strong short squeeze but it faded the very next day. The index is chopping around in a narrow range under resistance because of the election uncertainty. The path of least resistance here is down under normal circumstances. The fund year-end next week is the wild card that could push us higher. However, they will have to buy more than just the top ten big cap tech stocks to actually lift the market.
The Dow chart is weaker because of the narrow breadth and the lack of tech participation. Microsoft was the exception but Intel, Cisco and Apple have been floundering. The Dow chart is in a confirmed down tend until it closes back above 18,400. The red down trend resistance line is the key. That is pushing resistance slightly lower every day. Note that the Oct 13th plunge below 18,000 was a three-month low and the index has not rebounded materially.
The buying in the big cap techs has lifted the Nasdaq 100 ($NDX) to within 42 points of a new high. The current high was on Oct 10th at 4,893 and we closed at 4,851 on Friday. This is our best shot at generating a rally. If the Nasdaq closes at a new high it would produce some positive market sentiment that might drag hesitant investors off the sidelines.
The percentage of S&P stocks over their 50-day average rebounded from the 27% the prior week to 34.5% but the long-term trend since July has been down. A level under 20% represents a buying opportunity.
Normally a small number of stocks making large gains characterize a weakening bull market. The minor gains in the indexes give the appearance the market is healthy. The McClellan Summation Index measures the market breadth over a longer term to tell us what is really happening under the market. The index shows us that market breadth has been deteriorating since peaking in late July. The index is at the lowest point since early March and approaching a negative number. The low for the index in late January equates to the 15,450 low on the Dow and 1,812 on the S&P. That was the low for the year on both indexes. The $NYSI tells us the truth about market direction.
The Dow Jones Global Index has a similar pattern to the U.S. indexes only without the recent highs. The index is right on the verge of collapse below support at 317. Note the MACD has turned negative.
The bottom line to all the commentary this weekend is that the markets are weakening as the election uncertainty increases in the USA. Fund managers are facing a 5-day shot clock and that could be the saving grace for the markets next week. They will have to buy something even if it is wrong.
I do not want to be bearish on the market because we are in the best six-week period in Q4. However, this is not a normal year and it is far from a normal election. We need to trade what we see rather than what we want to see.
We should continue to avoid being overly long and keep a list of stocks we would like to buy at a lower level. We may get that chance.
Enter passively and exit aggressively!
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