At the start of the week, I said market tops are a process, rather than a moment (usually). Thus far this week, it’s been a chop fest suited to only the shortest term of intraday traders. While we won’t know if this moment is a top or just a consolidation period, until we look back at it in a few weeks or months, there is definitely a change in character from the non stop rally since Thanksgiving. I contend there remains no reason to make any outsized bets here, as if this is a consolidation period, one can jump back on the gravy train once a new high for the year is reached in the major indexes. And by ratcheting down risk here, one can curtail potential losses if we finally have this ever elusive breakdown.
Let us continue to also keep an eye on the NASDAQ (NASDAQ:QQQQ) where the 50 day moving average has obviously been ‘the tell’ of late.
Back in the fall of 2010 I mentioned the semiconductors ETF (NYSE:SMH) was not confirming the move up, and as a leading indicator type of sector that was making me cautious. In retrospect, that did not matter as a flood of liquidity overwhelmed any doubters. But for the first time since September, yesterday saw the semiconductor ETF (NYSE:SMH) break below the 50 day moving average. That should provoke some caution.
Copper (NYSE:FCX) – another major leading indicator – has also been quite weak the past few weeks, and yesterday was punched in the gut. It also has broken down below the 50 day moving average over the past week.
In “normal markets”, these sort of events would be serious warning flags. The current market acts very abnormal so I don’t know if they hold the same sway, but you have to go with historical references unless you want to just fly blind and believe in the mantra that the Fed is an omnipresent being (which in time will be shown false). So until proven otherwise, we have mounting yellow flags to heed.
This is a guest post written by Trader Mark who runs the blog Fund My Mutual Fund.