September was an ugly month for the stock market. The S&P 500 recorded 10 distribution days, and the Nasdaq recorded 8 distribution days. The selling picked up at the end of the month too on even heavier volume. The arrows shown below mark distribution days in the market.
Small cap stocks are also continuing to look bad with heavy selling in the Russell 2000 (IWM). And the dollar continues to surge which is a sign of risk off in the markets. I would look for October to potentially be a bad month for the markets if September is a forewarning.
Gold still hasn’t made a new low yet sentiment is about at rock bottom. As a contrarian that gets me interested. Here are some things we know about the current gold market:
1) Commitment of Traders report is out tomorrow and should show further reduction in shorting by the Commercial Hedgers, and possibly a net short position by small speculators. That is a bullish sign.
2) Sentiment is awful, Mark Hulbert just came out and said his gold timers index was at its 2nd lowest level of bullishness in 30 years. That’s simply amazing.
3) My own personal sentiment gauge is about as low as it gets. People that I observe to normally be bullish are totally in despair and don’t think there’s much hope. Bears on the other hand think they are in control and are writing blog posts about how bad gold and silver look.
From a technical standpoint there’s a few things I like as well. First take a look at the gold contract, I can’t help but notice the huge upside volume today and the possibility of a reversal candle being put in. Also we are talking about a long move to the downside here without much of a countertrend move, this has been going on since July. The September decline was really driven by the surge in the U.S. dollar, if that just stops and the dollar moves sideways gold might have room for a big relief rally.
Secondly the miners are still not acting that bad. Some of them got hit hard on this dollar rally but they still are making higher highs and higher lows against gold. I think this is all part of a long term bottoming process for the sector, take a look at the GDXJ to GLD ratio below.
Leadership has narrowed in the stock market, which usually isn’t a good sign for the overall health of the market. However certain sectors like Health Care keep powering higher. XLV and IBB both made new 52-week highs today.
Another pocket of strength in this market is what I’m going to dub the “Selfie Bull Market”. For the initial Selfie Index I’m going to include 4 stocks: GoPro, Ambarella, Facebook, and Google. Apple being the other major phone maker could also be included but Apple isn’t as much about selfies as these other 4 stocks. GoPro cameras help you take your selfies, Ambarella provides camera technology that powers a GoPro, and Facebook and YouTube (Google) is where you post your selfies for everyone to see.
GoPro is the newest IPO of these stocks, followed by Ambarella, then Facebook and Google. All 4 stocks have solid chart patterns. Taking a look at GoPro below you can notice the volume coming into the stock is still quite strong compared to its entire trading history (which isn’t that long). GoPro initiall shot up after the IPO, then based for a couple of months before resuming the uptrend on volume once again. I’m not a huge fan of buying IPOs this early because they tend to go up quickly, then stall out for a long time. But GoPro could probably be owned as long as it remains above its 50 day moving average.
Ambarella has based for most of this year, then broke out on volume recently. This chart looks solid to me you can see the clean retest of the breakout at 34 recently then it shot higher again.
Facebook is still in a nice uptrend above the 50 day moving average. It’s one of the growth stocks in tech that is actually making new highs above its March 2014 highs.
Google is still fighting to take out it’s March 2014 high. Google is the weakest looking stock of these four but should break out if tech stocks keep moving higher.
Anyone who has recommended small cap stocks this year has likely been wrong. The name of the game this year has been large cap stocks, whether it was in tech, healthcare, finance, or even during some of the bounces we’ve seen in other industries. 2014 has been a defensive year for the big money. Whether that is leading to a bear market remains to be seen. Some people are claiming that overvaluation in stocks is going to setup the next bear market. Overvalued seems to keep getting more overvalued though in the meantime.
Take a look at IWC shown below. This chart reminds me very much of GDX when it topped in 2011 for the mining stocks, which I’m showing right below IWC. Look how it’s just been a volatile mess all year. That isn’t the sign of a healthy market. Thrashing often precedes a bear market or a major top. Notice how we have 3 lower highs now, but we aren’t quite making lower lows yet. We’re spending a lot of time below the 200 day moving average now though.
GDX was a complete mess during 2011 while gold was very strong. This was a harbinger of bad things to come for gold stocks. Again thrashing preceded the bear market in mining stocks. It took a whole year for GDX to top which is quite a while to frustrate bulls and bears.
IWC from a weekly perspective looks like a classic Stage 3 top. Notice how on the latest move higher we didn’t test the top of that triangle. That is not a good sign. That means that support could fail quicker than you think here.
GDX had a final Stage 3 to Stage 4 breakdown in late 2011 and early 2012. Then it was a Stage 4 downtrend with fake rallies along the way down.
Small caps are acting eerily similar to gold stocks in 2011, which is bad for the overall market if they are forecasting a bear market or major correction for stocks. Keep an eye out for a Stage 4 breakdown in IWC.
Oversold isn’t a buy signal, but it does give an indication of excessive bearish sentiment that is unsustainable over the short term. It’s impossible for a market to remain scared to death for too long because it eventually runs out of sellers and buyers push the market back higher. At that point you have to re-evaluate and either prepare for the next downleg in a bear market or if it’s the last bear downleg start getting ready for a new bull market.
Silver has been just obliterated over two months, but it’s also overdue for a major bounce. Silver has been oversold for two months now which is very rare and is at an oversold low for the year. Look for a crossover in the TRIX to indicate that this downleg is at least temporarily taking a break.
I find it very interesting that gold has gotten this oversold yet has not made a new low for the year or this bear market. Gold is now at its most oversold level for the year just like silver. So again it is likely this bear leg is getting long in the tooth. At the start of October it will be a 3 month long downtrend so it’s overdue on multiple time frames for some type of rally.