That old nemesis of shares � Europe � arose from the dead Monday, after an Italian election cast doubt on that nation's ability to implement austerity measures.
The selling was enough to saddle the Nasdaq Composite with its third distribution day, all major, in the past week. The S&P, for its part, notched its second.
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A general rule of thumb is that three to five distribution days in a one-week period is enough to flash a sign of caution. Practically speaking, "a sign of caution" translates to a speculator raising some cash, or in some cases moving to an all-cash position. A lot depends on the action of the cycle's leading stocks.
With the S&P 500 off only 2.8% from last week's rally high and the Nasdaq Composite just 3.0%, it hardly seems a time to be running for the hills. That is, unless one is holding some of the speculative growth glamours.
As noted in Thursday's report, the somewhat curious aspect of this three-month advance in the averages has been that only a few growth titles with good liquidity have moved up more than 25% from breakout.
The ramification of this is that the more-modest post-breakout gains seen in growth leaders are scarcely enough to weather a 3%-5% short-term reaction in the averages, let alone an 8%-12% intermediate-term correction. As noted previously, growth issues tend to correct 1.5 to 2.5 times that of the averages, if not more, in many cases.
The current growth leadership is the type of generally lagging growth-stock performance that is consistent with the latter stages of a bull market. That cyclicals have led underscores this.
Meanwhile, the action of the past week is an example of how volatility is mean-reverting. A period of low volatility, such as what was seen in the seven days highlighted in yellow in the above chart, tends to lead to a high-volatility period, as seen in the last four days.
Increased volatility often signals a trend change. Following a trend change from down to up, it usually continues early into a new advance and also late in one.
The view here is that the mild reaction thus far is likely to extend longer than the four days already seen, and for two reasons: 1) the median decline from peak for a universe of 56 growth titles is close to three times that of the declines in the averages, and 2) the reaction to the Italian election was extreme in the currency market, reflective of a shoot-now, ask-questions-later type of sentiment among global participants.
Other concerns also persist.
For starters, the housing-related shares account for 25% of the leaders. Any serious dent to their charts would suggest an impairment to the economic expansion. In addition to the builders, which are off 8.6% on average...
Chart created using TradeStation. ©TradeStation Technologies, 2001-2013. All rights reserved.
Weyerhaeuser (WY), Louisiana Pacific (LPX), Eagle Materials (EXP), Nationstar Mortgage Holdings (NSM), Ocwen Financial and Lumber Liquidators Holdings LL , et alia , come under pressure.
For a larger chart, please click here.
Chart created using MarketSmith. ©2013 MarketSmith Incorporated. All rights reserved.
For a larger chart, please click here.
Chart created using MarketSmith. ©2013 MarketSmith Incorporated. All rights reserved.
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