Market Cooling Heading into Summer
DOW JONES INDEX: It’s every other day for every other direction for the stock market lately, and this short-term choppy and volatile action is often a sign of a trend change, and in this case we believe that could be down. We suspect the Dow Industrials are setting up for a summer dip, which would be more likely given the move over the past two days below the recent support area of 17,500. That could take us to the low end of a range for the summer and we have been mentioning 17,000 for a possible correction target. All in all this market has been trending sideway since last September albeit in a large more volatile range. One of the other factors we are watching is the sentiment, and there seems to be too much of a desire to “buy the dip”. To counter this, the market fear level may have to increase from the generally complacent place that it is today before the market finds a correction bottom.
With respect to the first two red circles (labeled 1), we were concerned that a “head and shoulders” pattern was developing and the result could be a new leg lower which will take out the lower support line TR4 but we never got it. That was a critical time for the markets and it reversed the head and shoulders and rallied nearly back to all-time highs (see TR1).
Now the opposite trend pattern is in play as shown in the second red circles (labeled 2). There is a reverse “head and shoulders” developing which would suggest that we will see a new leg higher. However, we disagree and feel that the market is setting up for sell off to at least (TR 2) 17,000 or even (TR 3) 15,900.
Nevertheless, investment opportunities still exist in equities and to that end, we continue to hold an above-average allocation in cash, exercise patience, and look for opportunities to present themselves.
TRADING UPDATE: Investment opportunities still exist in equities and to that end, we continue to hold an above-average allocation in cash, exercise patience, and look for opportunities to present themselves. As mentioned in the past, we are not seeing clear indications of what areas of the market may lead in a recovery, so we continue with a bottom-up approach to security selection. The cash can be put to work quickly should we see opportunities present themselves and the potential for hedge positions will remain a trading tool to improve risk exposure in the portfolios.