*Distribution days are pilling up.
*Short-term volatility and correlation are picking up.
*Dividend-paying, defensive stocks (consumer staples) are leading the market.
*The deterioration among momentum stocks as a group has accelerated. The St50 index dropped 1.5% for the week.
These are all signs to be very cautious over the next several weeks.
When there is a sudden drop in the market from multi-year highs, people are instantly reminded of what it feels like to lose money. All of a sudden, chasing stocks is not mindless anymore. After the swoosh down in the middle of last week and the low-volume bounce on Friday, many indexes and stocks are sitting right below their declining 5-day moving averages. From a risk-reward perspective, this is the place where shorts are likely to push. It will be interesting to see if this is the case early next week.
Nevertheless, the trading environment has changed. We might be entering a period where mean-reversion setups might have a lot higher success rate than breakout setups.
Speaking of potential mean-reversion, basic materials have been the hardest hit sector. Consider some of the ag chemical stocks that took a huge hit over the past 10 days and now are back at long-term support levels. $RNF for example.
Homebuilders ($XHB) had a pretty rough week. The market has been discounting a recovery in the U.S. housing market for more than a year and it has been right for the most part. The news flow from the sector turned positive last summer and it helped to build on ever rising expectations. Builders have been priced to perfection and now it might be time for some consolidation, which would allow for growth rates to catch up with expectations. Not all stocks related to the housing sector suffered last week. Regional banks and some building material stocks ($APOG) are still looking healthy.
$KORS closed its earnings gap after announcing a secondary offering of 25 million shares. Insiders have been eager to sell ever since the IPO in December 2011. The demand from institutions have been strong enough to neutralize the supply from insiders. The transfer of ownership has been relatively smooth. Something that cannot be said about all IPOs.
$MENT continues to tighten near multi-year highs in anticipation of its earnings report, scheduled for Feb 28.
$V bounced from its rising 50dma as it continues to be the number one choice to park money when the financial sector is under pressure.
$N managed to hold near its 50dma and now looks ready to move higher. $69 is a potential pivot.
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Have A Great Weekend!