Stocks Fall Hard in Heavy Trade; Homebuilders Rally

A slew of positive economic data helped bolster the case for the Federal Reserve to taper its money printing scheme. Apologies, taper the quantitative easing program. The S&P 500 blew by a key level we had been watching in heavy trade as well as the NASDAQ. Leading the market to the downside were small cap stocks with the Russell 2000 falling 1.93% on the session. On the positive side, a better than expected homebuilder sentiment drove housing stocks higher in heavy volume. Volatility jumped as the fear trade kicked into gear one day ahead of options expiry. A nasty day of selling ahead of options expiry and pushing our uptrend out of the way. It is important to obey your trend following rules. Did you have a stock break through a key moving average, channel, or ATR stop? Whatever your sell rules are you must obey them. Ignore them at your peril. No one knows whether or not today was a buy-the-dip-day or the start of something more sinister. Do not ignore your rules. The S&P 500 did drop below 1680 in heavy trade leading us to believe we are likely to see the major index to test its 50 day moving average. For the NASDAQ, to see its 50 day moving average will take a bit more effort by sellers. Over the next couple of trading session how each index reacts to its 50 day moving average will be a key indicator how we proceed forward. Keep your focus on price action and the market will guide you. Sentiment continues to favor the bull camp, but has come in week over week. Bulls did drop on the AAII survey with Bears inching up a bit. However, bulls still sit at 35% while bears sit at 28%. NAAIM sentiment saw a dip in bullishness due to more bearish bets being placed on the market. We have yet to see extreme sentiment, but perhaps this is apart of the “new normal.” Either way; price rules our actions and everything else is a cocktail conversation. Stick to your rules and with Big Wave Trading.

Another Hindenburg sighting; Europe Emerges from Recession

Its official European nations are out of recession as GDP rises above expectations. The news did very little for US stock futures and neither did Mortgage Applications which fell 4.7% week over week. Homebuilders once again were weak on the session and continue to look very weak. Buyers kept to the sidelines today with the market drifting in a range all day long. Keeping the market from pulling back further was AAPL as the stock punched through $500 or what was known earlier this year as the generational bottom. We continue to move sideways in this market digesting July’s gains and we remain patient studying price. Another Hindenburg sighting was made today making it the 6th time in 8 days (Business Insider and Zerohedge confirmed) the magical formula for predicting crashes has shown up. The omen doesn’t have a perfect track record by any stretch of the imagination, but it did show up in similar fashion in 2007 and 2000 prior to those bear markets. Can we reasonably guess the same will occur? No. We’ll simply follow price action and let it dictate our next move. Key levels on the downside are 1680 and on the upside is 1710. If we do see this market plunge through 1680 in heavy trade we may have something to the downside. Until then we are sticking with our plan. Here are the Hindenburg Omens: http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/08/20130814_Hind.png Homebuilding stocks continue to take a beating and today was not an exception. ITB and XHB are in downtrends and continue to act weak. Both ETFs are signaling more lows and if buyers do not step up here homebuilders are at risk of a steep decline. Probabilities say a modest decline is certainly likely. In the same boat, but further down the stream are JNK and HYG. High Yield tends to run alongside equities, but not since May. HYG and JNK continue to show weakness in the High Yield space calling into question if we are about to see some trouble in High Yield land. As the 10 year moves higher the ability for questionable borrowing will simply become more difficult to obtain. Perhaps another “omen” for this market, but we’ll need to see further evidence. Will the Hindenburg turn into something real this time around? Stay tuned.

Market Participants await Economic Data and the Fed

A quiet day on Wall Street today as summer trading continues. Many are likely still trying to recover from their weekend festivities. Perhaps many were with Steve Cohen. Pending home sales weren’t as bad as the market was looking for, but was still negative month over month. Dallas Fed Manufacturing activity index was lower than expected coming in at 4.4 (expectations were for a reading of 7.5). The market was able to find its footing just after the European close. NYSE volume ran just below Friday’s level and closed that way too. NASDAQ saw volume drop too. Major indexes were able to avoid distribution given volume was lower on the day. Today was not a game changer as this uptrend continues to march on. The talk of the town continues to be whether or not the Fed Chief Ben Bernanke will hint or talk about tapering the Fed bond buying program. QE and ZIRP have destroyed those who have saved by compressing short-term and long-term rates forcing folks into riskier assets. How does this translate to how we react in the market? It does not, but as a matter of policy debate we can certainly point out how much we have destroyed the earning power from savings. Who wins out Wed the Doves or Hawks? Leading the S&P 500 higher today were utilities. Despite the 10 year yields rallying slightly today utilities found love. On the downside the two notable groups lower were Financials and Oil & Gas. While Oil & Gas lead to the downside losing .84% Financials were down .72%. If it weren’t for the Financials earnings growth would be downright dismal. ZeroHedge has been quite vocal on this point. Financials or XLF is one sector to watch. While a pullback is normal, but if the group turns into ITB/XHB would be a big red flag for this market. Until then, there is no reason to think this uptrend can’t continue. We can guess if the market has topped or not, but we simply do not have evidence it has done so. Yes, housing stocks have rolled over and are poised to continue lower. However, they are really the only group looking like the downside is the path of least resistance. Cut those losses.

Obama’s Economic Speech Fails to Inspire Buyers; AAPL Jumps

A big jump in New Home sales failed to get the market going as the homebuilders sold off hard on the news. The talk of the street was AAPL earnings and the stock’s big move on the day. Without AAPL the NASDAQ would have notched a day of distribution. The S&P 500 could not escape distribution settling down .4%. Even though the NASDAQ did not suffer the same fate as the S&P 500 it did give up almost all of the gains had at the open. Not typically something you want to see in an uptrend, but it isn’t a gigantic red flag. In after-hours trading we had quite a few earnings moves setting up nicely in the morning. We are still without enough distribution days and negative price action to call the end of this uptrend. While we may be long in the tooth we don’t have the proper signals telling us this is over. AAPL was an earnings winner as many were calling for an atrocious quarter from the technology giant. More earnings in the after-hours session will help set the tone tomorrow at the open. Earnings gaps have been a great way to play earnings season. Stocks must meet certain criteria before they can be considered, but they can be quite profitable. Homebuilders sold off in heavy volume and it comes to no surprise even with a big jump in new home sales. ITB and XHB are certainly struggling and while the housing data points to a positive outlook perhaps fundamentals truly are best at tops. In addition to ITB and XHB another key sector looks to be rolling back over and that is XLU. After rallying along with bonds (yields falling) yields raced higher today putting pressure on Utilities. Utilities are far from sexy, but along with Housing this sector is seeing quite a few headwinds. You’ll find plenty top callers in this market. It has proven to be a fool’s game trying to game a market top. Don’t call tops and ride your winners.

S&P 500 Hits another All-Time High

Today was a quiet day in the Market as participants ease back into trading from the summer weekend. Existing home sales disappointed where by sales dropped 1.2% month-over-month. Clearly higher rates have put pressure on the housing market. Chicago Fed Activity index show a slight drop of .13, but who really follows this index anyway. The disappointing housing figures helped push the market higher. When there are no sellers it is quite easy to push the market higher with very little volume. Volume dropped from Friday’s option expiry inflated figure, but we weren’t really expecting volume to surge. The S&P 500 hit a new all-time high on small gains, but hey it is still a new high. Distribution really isn’t hounding the market and we still no reason to call a top here. This market continues onward and upward with this uptrend despite those who continue to fight the trend. Earnings continue to be the focus and MCD delivered its results prior to the market open. Unfortunately, it missed its estimates and the market punished the stock throughout the day. Overall, those who eat less MCD tend to be a bit healthier people in general. MCD clearly weighed on the Dow Jones Industrial Average and the stock does appear to be entering into a downtrend. MCD is not a typical name we’d be involved with, but given its price action to date we’d avoid the long side. Housing stocks will begin to deliver its earning releases shortly. ITB and XHB continue to look very top h heavy. ITB looking the worse out of the two, but both clearly are struggling at the moment. Nothing in this QE/ZIRP driven market would surprise us, but it does appear the housing stocks are set to go lower. PHM reports before the bell on Thursday and it appears to be rolling over. So much of the economic recovery talk has been surrounded by the housing recovery will make this week interesting. SHW disappointed with its earnings, yet HD and LOW are near or at highs. LL reports on Wednesday too. HD and LOW do not report till the middle of next month. Keep an eye on housing stocks as well as to those who are tied into it. Gold and silver pushed off their lows nicely today. Certainly here in the short-term a bottom is in place. We have certainly seen a few cover here. Does it mean gold and silver are headed back to 2012 highs? It does not. We’ll be patient and wait for proper entries and use proper risk management before entering into any trade. Nice way to kick off the week with gains. Stick with the process and have a great week!

Light Trading Volume persists; Stocks pull back notching a Day of Distribution

A better than expected Homebuilder sentiment reading failed to lift stocks and sent homebuilding stocks lower. Trading volume rose above Monday’s level, but again was below average. The major stock indexes did notch a day of distribution in technical terms. However, the damage was minor and we are considering this to be a light distribution day. The S&P 500 and NASDAQ Composite ended its win streak at 8 straight days of gains. Traders now await Ben Bernanke’s testimony tomorrow. There were pockets of weakness, but until we see more of this action this uptrend still is in play. TSLA was the talk of the town after the stock fell more than 18 points. The stock has had an amazing run since its initial breakout in April. The stock has more than tripled from that point to now. It is not unlikely to see the stock break after hitting new highs. If you bought the recent low volume breakout you are likely underwater and highlight a point of being nimble when buying extended stocks. However, if you are in from April you have plenty of leeway. Just remember to take profits along the way. If you have a sound trading plan you aren’t panicking over the move. If you are, come join us. Yesterday we pointed out the homebuilding sector as being weak. After initially climbing after the sentiment release the entire sector sold off. Today’s action highlights what you think may not necessarily happen. The price action as of late has been bearish, not bullish. Could the sector turn around after tomorrow’s release of Housing Starts and Building permits? The answer is yes, but given the evidence we have now it doesn’t seem likely. Stick with price and ignore the noise. There were plenty other leading stocks like XONE and SSYS who were hit today. It is not unusual to see leaders get hit, but when they begin to get hit all at once over a period of time it usually spells trouble for the overall market. Today was one day and we remain in an uptrend. Until there is sufficient evidence given to us from price we are going to stick to the long side. Maybe the top callers will be right here…or they won’t. Enjoy watching the fireworks go off courteous of the Fed Chief.

Stocks Drop as Volume Soars

The Federal Reserve remained the focus of many traders and pundits arguing over whether or not the Federal Reserve should taper or not. Meanwhile, sellers got to work and pushed the market lower for majority of the session. Even a last second effort by buyers was knocked down at the close. Volume soared across the board as institutions rushed into the market. Homebuilders were hit hard despite the existing home sales came in higher than expected. Gold and Silver went back to September 2010 levels as both precious metals were crushed (despite physical demand for gold continues to move higher). With the major markets having put in a lower high and a lower low a downtrend is certainly here. There wasn’t much that was spared from the onslaught of selling. The 10 year Treasury note is yielding above 2.4% and the 30 year at 3.51%. Big moves in just over a month for yields, but are they spiking because the economy is getting better? Or is it simply Ben Bernanke will no longer be buying as many bonds? Headlines came out the fed was going to taper to $65 billion a month at the September meeting and end the bond buying program next June. This announcement only threw fuel onto the fire and accelerated the decline further. It is best to step aside when a freight train is headed your way. Having a sound strategy in times like this will certainly keep you calm. Many will be driven by emotion and make costly errors while we will take advantage. Here is a screen shot of the Hindenburg Omen. You’ll notice we have gotten 6 signals since the end of May. It almost appears certain we’ll get a correction with this many signals showing up. Cut your losses and ride your winners. Have a great weekend.

Stocks Close Higher ahead of the Fed

Anticipation of the Fed tomorrow is tremendous as traders position themselves ahead of tomorrow’s policy announcement. On the economic front today weaker than expected housing data failed to halt the rally in homebuilding stocks today. Homebuilding ETFs regained their 50 day moving average a show of strength. Buyers were out support stocks yet volume lagged behind Monday’s pace suggesting buying fever wasn’t too high. Tuesday’s returned to positive side as the last two Tuesday trading sessions have ended in the red. Today’s price action certainly has put the market in a more favorable light for the bulls. Of course, tomorrow can change this picture in a heartbeat. However, given the recent action there hasn’t been any signals suggesting we have much downside from here. Homebuilders have certainly made a come back and judging by the volume seen in the ITB ETF buyers were rushing to pile back in. Defense of the 50 day is a big positive for the ETF and stocks. Last week it certainly appeared as if homebuilding stocks were going to head below their respective 200 day moving averages. Crude oil settled above $98 a barrel. Higher crude prices will certainly hurt the consumer despite all the good news regarding “shale oil” and “shale gas.” Higher commodity prices in general will have a great impact on lower income families and continued rising crude oil prices will certainly keep the squeeze on. DBC – Powershares Commodity tracking fund is poised to push higher from its latest consolidation. Not only will stocks have fun tomorrow with the Fed announcement look for the commodity sector join in the fun we call volatility. There will be a lot of talk from the financial press on how to manage ahead and after the Fed policy statement. Let price be your guide rather than your opinions. Ego gets in the way often and leads to issues trading your portfolio. Let it go and follow Big Wave Trading and our process guiding you through any type of market. Enjoy watching the fireworks!

Big Wave Trading Portfolio Update And Top Current Holdings

The Big Wave Trading Portfolio remains under a SELL signal on all indexes. However, we do take note of the positive price action and strong volume (even though it was options expiration related) on the indexes and more importantly on the oversold beloved-stock named Apple (AAPL). Volume on AAPL was the highest since March and comes on an excellent intraday reversal. We call that positive price action. However, there is no way, based on Friday alone, to know if this is the end of the downtrend or just an oversold bounce. Some of the positives going for the market is the fact it is very oversold on the short term, the crowd is increasingly becoming more bearish, and AAPL’s price and volume move on Friday. Some of the negatives are that there is still no obvious rotation from old leading stocks into new leading stocks, most recent strong sectors (IBB XHB ITB) are starting to crack on heavy volume, and despite sentiment growing more bearish there was absolutely zero fear in the most recent pullback. Everyone truly believes Ben will save us from every big bad market decline. The only way we see it at Big Wave Trading is that you must keep an open mind to everything and anything in this new QE-fed world. There is only one two ways to trade this market: trend following signals and value investing. The old momentum methodologies that made position traders like me wealthy during our early career have been missing since the 2008/2009 stock market bottom. This is a direct correlation of a QE/ZIRP policy. So, even though it seems the market is not done selling off, you must keep an open mind in the regards that Ben will indeed come to the markets rescue any time it even attempts to move lower. We have taken notice of some stocks that made very strong moves on Friday. However, we will need to see further positive price action next week or the week after to know if it is more than a one day options expiration wonder. The social networking site FB sure has been putting in some impressive price and volume action lately. That stock is definitely a stock that should be on all trend following wizards radar. It is too much of a cult stock and has so much volume that it is mandatory active and inactive traders watch this stock for trend following signals. Overall, we remain extremely heavy cash at Big Wave Trading due to the inability to trust price and volume action in the current choppy tape. Without any spike in the VIX, it is hard to believe a real bottom is here and while we are short some index ETFs we will be ready to reverse those positions ASAP if we continue to see further price appreciation. At the same time we do know another 2010 and 2011 pullback is more than likely to happen sooner or later and we will be ready to act accordingly when the time does come calling. And come calling it will one day. You can not keep an artificial economy up forever. Can you? Maybe you can. It’s a much different world than it was before QE. Get used to it. I doubt it changes any time soon. I doubt it changes any time not too soon (4 years at least). On that chipper note, have a great weekend everyone. Surf is up on the north shore and the sun is shining. Aloha!! Top Current Holdings – Percent Gain – Date of Signal AVD long – 112% – 1/10/12 NTE long – 102% – 8/17/12 VRNM short – 58% – 4/10/12 CAMP long – 47% – 4/26/12 ASTM short – 37% – 7/17/12 CSU long – 33% – 9/4/12