December 12, 2021

The major averages gave a good account of themselves last week after surrendering little ground following Tuesday's gap higher.

But the week's takeaway was the disappointing breadth shown Thursday and Friday. This followed three positive days of performance from the average stock as the averages rallied. During periods like this when a breadth divergence takes hold, one must place more weight on what the average stock does and less weight on what the narrow averages are doing.

Up to this point, the NYSE advance-decline line was actually not in divergence with the S&P because the S&P had not made a new high that had gone unconfirmed by a new high in the A-D line. Things changed on Friday as the large-cap benchmark printed a new high that was unmatched with a new high by the A-D line.

This merely confirms what the percent of NY stocks above their 200 m.a.'s have been telling us for months.

Within the list, of note were the retailers, which rolled over after their first rally to the 50 ma went limp. The chart, below, reflects a real change in character recently when we look at the RS line slope. Given that retail sales is about one-third of the economy, this indicates the market's expectation of of slower growth next year.

Semiconductors, which had been leading recently, are seeing their No. 1 and No. 2 stars, Nvidia (NVDA) and Advanced Micro Devices (AMD), rolling over. As noted on Twitter, if large investors are not interested in these two, it does not bode well for the group overall.

There remains nothing in the way of long pattern setups worthy of our attention. If there was one stock that is at all intriguing on the long side, it might be Snowflake (SNOW). 

SNOW's ability to hold up amid the selling elsewhere in its enterprise software group may be tied to the Street's outlook for next year. It is expected to go from a loss this year to a profit next year. Contrast that with so many other group members whose net is expected to be in the red again next year. SNOW, while it sets up as an early entry, is not on the Focus List.

As the market rallied on Monday, Tuesday, and Wednesday, I was waiting for some setups to develop on the short side. Accordingly, Thursday and Friday saw some softwares roll over, and five short ideas were placed on the Focus List for Friday's session. So far, so good. Two more have been added for Monday's session. Their success will hinge to an extent on the market itself.

The following names are believed to be the most attractive for our strategy of speculation in the $13+ market.

Jinkosolar (JKS)

Atlassian (TEAM)

In summation, the major averages' strength is masking weakness in the broad market. This has been seen in the percent of NYSE issues above their 200 ma failing to keep up with the S&P. As of Friday, it is also being seen in the NYSE A-D line's inability to match the S&P's high. Fresh longs are off the table, as much for the breadth divergence as for the lack of attractive setups and successful breakouts. Selected shorts make sense for those so inclined. Otherwise, cash is king.

Kevin Marder

Trading Lessons
Introduction to the service video (38:00)
Money management and risk management video (20:27)
Bread and butter pullback video (11:10)
Bread and butter pullback: Pt II video (15:09)
Bread and butter pullback: Pt III video (31:48)
Bread and butter pullback: Pt IV video (30:16)
System R
Short-selling video (25:53)