Focus on the Trees, the Forest Will Take Care of Itself

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Last week was a wild one. The S&P 500 actually finished fractionally higher. There was a positive divergence on Monday as the S&P 500 held above support. The market traded sharply higher for the next few days and all heck broke loose Friday.

Earlier in the week the market traded higher on hopes that Spain would ask for access to credit facilities. The S&P 500 was up 1.0% on Tuesday as earnings season really got rolling. Several tech companies reported disappointing earnings on Wednesday but better than expected data on housing starts carried the day and the market traded higher again. Mid-day Thursday cracks started to appear. Google released earnings earlier than expected. The numbers were awful and the stock was halted for hours. It had a huge gap down and took the NASDAQ down with it. More disappointing earnings from the industrial and tech sectors led and Friday saw the S&P 500 trade off by 1.7%.

There were positive and negative divergences last week. The best performing of the major averages, the S&P 500, held support and sparked the rally. It was a short lived bounce. There were some divergences in the advance-decline lines that technicians like to follow. There was an all-time high in the NYSE advance-decline line. This was not confirmed by the other A-D lines or any of the major averages. This signaled potential trouble. The perceived poor earnings reports and no progress on the debt issues in Europe caused sellers to step in and take over Friday.

The technical condition of the market is extremely choppy. With 65% of the stocks in the S&P 500 either basing or advancing you can certainly find more than your fair share of winners. It is a concern that that number spiked higher mid-week and then declined. Do not become solely focused on “the market”. Keep a close eye on the individual names in your portfolio. Respect the moving averages and support levels. Here is a quote from William O’Neil to keep in mind when you are looking through your portfolio: “The majority of investors stubbornly hold onto losses when they are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.” Taking a loss is never fun or easy but the question is how is it going to perform going forward, the market doesn’t care what you paid for the stocks you own. Or, as Wayne Gretzky once said, “be where the puck is going to be.”

The key level of support for the S&P 500 last week was 1424. When that held the markets moved higher. That level has come into play all day today. I am sure the S&P 500 will trade below that level for much of the day and shale out those that are overly skittish. With earnings season upon us the market will be volatile. If the S&P 500 can close above 1424 the next few days we can see better trading in the market. Use any rally to go through your portfolios and weed out names that are breaking down fundamentally and technically.

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About Thomas J Smith CFA