The Fund is about 40% invested in short-term bonds with 60% in Cash. I sold several stocks as stops were triggered and placed all proceeds in cash since bonds look a little extended. Many of the Cloud and Software names were hit with heavy selling (especially on Thursday) as sellers dominated buyers. The Cloud and Software stocks were two of the best performing sectors coming out of the Christmas Eve low, so they seemed “ripe” for profit taking. If the market is about the stocks first and the indexes second, does this leading group breakdown bode badly for the market? Time will certainly tell. This heavy selling in the better performing sector leaders reminds me of the period prior to the 19% market drop we witnessed in Q4. So far, it just seems like profit taking and sector rotation, but I would not be surprised to see some more selling spill over into other “hot” areas and then possibly the indexes.
Large caps are outperforming small caps which is okay, but I would like to see the opposite as a possible confirmation that “risk was on”. The broad market is in an uptrend and the major indexes are approaching the Q4 all-time highs albeit on lighter volume known as “wedging”. I believe declining volume and rising prices (wedging) does make the “semis” more susceptible to pullbacks so I will be watching this closely for clues as to our next potential opportunity. Junk bonds are trending higher indicating to me that investors may still have an appetite for risk. Potential negative news (Muller Report and China Trade) seems to be out of the way at least for now so that should be good for the long side of the market. The Fed appears to be led by a “flock of doves” aimed at keeping interest rates low with the potential for the next move to be a cut instead of a hike seems to be welcomed by the stock market. The jobs number was much like Goldilocks’ porridge, not too hot as to provoke the Fed out of its dovish posture and not too cold as to conjure up images of an economy screeching to a sudden halt, kept things percolating higher on Friday. Money keeps flowing to where market participants assume the best chance for a rise in prices and some money appears to be flowing into the semiconductor space in possible hopes of a favorable U.S. – China trade deal. The “semi” space is typically a higher risk area so “semi stocks” under accumulation would indicate to me that investors are in a “risk on” mode. In summary, the market seems to be sending mixed signals, but all appears well at least for now.
Another recent “hot” sector that appears to be wilting fast is the “Weed Patch”. The marijuana stock group was growing like “wild weed” out of the Christmas Eve low appears to be “exhaling”. The recent “high-flyer pot” stocks like Tilray, Cronos and Canopy Growth are all trading below their 50-day moving averages so I would assume this is “dead” money for now. Leading groups that start to “crack” as sellers pull the rug out from beneath otherwise constructive chart patterns may not be “constructive” market action in my opinion. The banking sector is another area that recently caught my attention with a sharp five-day down-elevator “rug pull” right before 1st quarter earnings season. Are the big banks trying to warn us of lower earnings that they will be releasing starting this Friday? Some Chinese stocks appear to be under accumulation in hopes of a U.S. – China resolution in the near future so that could be constructive action. Regardless of what my emotions and opinions might be saying, I try to remain flexible and open-minded and let the charts dictate my actions.
Bottom line: I am seeing the waters as a bit murky at this time. I would like to see if the market can break through this area of “resistance” formed in Q4 before I re-commit capital to the market. I am a risk manager and would consider risk to be lower if we get through this area of resistance which is where the market started its 19% decline into the Christmas Eve low. Sector rotation is somewhat healthy in an on-going bull market as long as the money moves from one sector to the another. However, if the money starts to flow out of the leading sectors into money markets then I will become more concerned that the market may be in trouble. For now, the light is “green” but could be changing to “yellow” so keep your eyes on the road and never ever fall asleep at the wheel. That could be a life-changing event that I am always working hard to prevent.