The following report was provided to subscribers on Wednesday, July 31.
The stock market continues to represent above-average risk.
For starters, the Nasdaq Composite is eight weeks into a rally following a five-week, 10.8% correction. Yet there has only been one major accumulation day if one doesn’t count June 28, the final day of Q2 when volume swelled due to portfolio balancing. Ditto for the S&P 500.
(While I am not making a prediction, this reminds me of late-September 2007. Following a correction, the S&P rose for six weeks with just one major accumulation day. Then, I looked back in time and noticed this had not occurred since the 1970’s. A market can only go so far without volume. A week later, the index moved into new-high ground on -24% volume. A week after that, the market topped and the 2002-2007 bull was done.)
With some exceptions, recent breakouts do not act well. Failures include Advanced Micro Devices (AMD), Amazon.com (AMZN), Cornerstone Ondemand (CSOD), Elastic (ESTC), Facebook (FB), Luckin Coffee (LK), Paylocity Holding (PCTY), Servicenow (NOW), Shopify (SHOP), SVMK (SVMK), and Zendesk (ZEN), among others.
And then there is the matter of pattern setups in the growth sector – one can count them on the fingers of one hand.
In light of the above, the position trader of breakouts no longer has the wind at his or her back. Accordingly, risk should be reduced by abstaining from fresh-money breakout buys. Those holding open positions should manage each on a case-by-case basis.