What We're Reading

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Reasons the market looks ready to pull back May-July:

  1. Treasuries have a relentless bid recently, and as I have discussed recently there was major accumulation of 80,000 Treasury (TLT) July $113 calls. Although this is just one large position, action in the TLT has tended to be right, and can see my call from 2013 to short the TLT in the 120's before it crashed to below 105.
  2. Sector flows showing a flight to safety. The consumer staple names and large caps are starting to outperform, a risk-off market, and options action dictating the same with most of the sizable call buying occurring in boring large cap names like McDonald's, Wal-Mart, Pepsi, along with Energy.
  3. Seasonality - The market tends to struggle in the May-July period, and although I do not have the numbers on me, @RyanDetrick is always posting great data, and also aligns with the Presidential cycle.
  4. Price-Action in Momentum - I am watching a premiere growth name like Under Armour (UA) post a fantastic quarter and trade down 10%, and it is happening with plenty of other names as well. VMware (VMW) was crushed on solid numbers and F-5 (FFIV) gave up its earnings gains quickly and closed lower, just a few examples.
  5. The anti-Apple trade - The market has been on a strong run with Apple not participating, but now Apple is starting to lead relative strength, and now being a big, old dividend Co. buying back stock, it's just another example of the style-rotation to large caps from small caps.
  6. The Large vs. Small Cap Divergence - The S&P traded right near record highs this week, yet the Russell 2000 (IWM) remains 5% off the highs and still below its 50 day moving average.
  7. Ukraine - This crisis will simply not go away, and appears to be escalating with Russia sovereign debt showing a reason for caution
  8. Volatility Depressed - We have seen brief rallies in the VIX, but overall have been in an extended period of depressed volatility, and with some uncertainty regarding how the market will react once the Fed tapering ends, and also other Macro factors, it seems the market is under-pricing risk
  9. S&P Weekly RSI Divergence Due to Play Out - The channel up pattern I have been highlighting for a long time now remains intact and the 20 week EMA has been very supportive, but there is a notable divergence in RSI in a downtrend (see below). The downside levels of interest in the S&P are 1,818/1,775/1,750, but if we take out1,800 again the channel will break and can look for a move back to the 38.2% Fibonacci from the start of the November 2012 low at 1,685, this would align with a 10% correction

There are probably 5-10 more factors I could come up with, and may add at a later time, but this is a start. Into the second half of 2014 I expect growth to really pick-up and earnings have been coming in very strong this quarter. Stocks will likely close the year with the S&P above 2,000, but for the current 3 month outlook the reward-risk is not that great at this level. Furthermore, it's Summer, enjoy the weather, spend time with family/friends, take vacations, go camping, enjoy nature, and take a break. The market will be here when you get back, and opportunities will be greater. Work to live, don't live to work.

Courtesy of OptionsHawk hat tip to member Sadiq

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