Last week is a perfect example of why you just have to love the market. The “consensus,” of course, was that we would drift higher due to it being a holiday-shortened week. Well, we all know how that worked out. So next week should be interesting. All that can be said is to beware of “consensus,” especially when dealing with this market. It will almost always disappoint and frustrate the “crowd,” which brings us to another bit of conventional wisdom: that the market will rally into the New Year. While this may or may not happen, it seems to now be the majority view. Some of the recent sentiment gauges reflect this. Just something to keep in mind.
Do we then doubt that a “Santa Rally” or something similar might be in the offing? Are we convinced that the top is in? Hardly. It all comes down to U.S. monetary policy, you see. The amount of liquidity that has been and continues to be pumped into the equity markets has gone a long way to inflate prices and it may very well have a long way to go. One dismisses this at his peril. Coupled with the health of the U.S. dollar, or the lack thereof, and this is cause for concern, as we don’t see either the Administration or Congress dealing in any effective way with the dollar’s long-term prospects. The value of the U.S. dollar is based solely upon our monetary policy and we all know what that policy has been. Then there’s the inevitable question: just when and how the Fed will tighten.
Again, these are all just things to keep in mind when formulating the thesis upon which you plan to operate. Ultimately, we aim to trade by what we see, not what we think. So let’s look at what we’re seeing:
The Russell 2000 has been printing lower highs and lower lows since late September.
The small-cap indexes have certainly weakened, as the Relative Strength Lines of both the Russell 2000 and S&P 600 are at levels not seen since March.
The Nasdaq, meanwhile, has gone from leading the market to lagging the market. It found support at the 50 day moving average on Friday, however, which is quite positive. We want to see buyers return and to not have to squint to see them….
While it’s true that the market has been acting somewhat weak for about a month, the 11/9 follow-through day notwithstanding, we are still finding plenty of stocks to buy:
One that we are currently watching is HITK, which looks to be in the process of forming a rather nice cup-shaped base:
On 9/8, we wrote: “Hi-Tech Pharmacal (HITK ) is certainly thin and volatile, but it is also showing some constructive action lately and we wanted to share its chart with you. While not what we would consider a Monster Stock candidate just yet, it exhibits some of the early characteristics we look for when trolling for potential future winners. One of those characteristics is a sustained positive volume signature, such as HITK has enjoyed since March.”
On 9/9: “Well, the stock made us look like we know what we’re talking about as it rocketed 24% higher today after blowing away earnings.”
HITK has some impressive earnings, to say the least, and fund ownership continues to expand. Liquidity is improving too. If this is indeed a cup base that HITK is forming, we’ll want to see volume remain muted along the bottom and grow as it climbs the right side of the base, indicating institutional demand. It’s all hypothetical now, though, so we continue to keep a close eye on it to see how events develop.
The market will have a lot to say about that….
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