Top 10 Report – October 2, 2019

Market Insight

Good Morning,

It would be hard to interpret the last few days action on the major indexes as anything other than bearish. The DOW was the only index that managed to finish yesterday’s session above its 50-DMA, however slightly. Meanwhile, the S&P 500 rolled over and joined the NASDAQ below its 50-DMA and the small-cap Russell 2000 careened below both its 50 and 200-DMA’s.

The distribution count is now up to 6 days on the NASDAQ and 5 on the S&P 500, which is especially concerning because most of these distribution days have piled up over a short period of time, thus constituting a distribution cluster. Not to mention, there are still quite a few broken, prior leaders that look like they have the potential to continue to fall much further from where they currently stand.

For example, many of the biotech/medical and technology stocks, especially the software names have taken a major beating recently. Plenty of these stocks ran up sharply over the last year or so and even though many have already fallen a great deal from their all-time highs, they are still highly susceptible to further selling from here.

On the other hand, there is no shortage of high-quality names with leadership characteristics that are forming constructive bases either. So far, the action continues to have the look and feel of healthy rotation. Going forward, old leaders should continue to fall to the wayside, many of which will fall as much as 80% from their all-time highs and never come back again. New leadership should continue to shape-up and replace the old, which is exactly what we want to see happen.

This sort of bifurcated action and wild volatility best lends itself to traders with a shorter-term time horizon. I think it’s fair to say that there is money to be made on both sides of the market here, although I would be very careful not to overstay your welcome in either direction.

For those of us ultimately looking to establish a few large, concentrated positions in leaders with explosive growth, the current environment is far from ideal. For those that can’t keep their fingers off their buy and sell keys, it is wise to minimize exposure until a more favorable environment develops. Otherwise, cash continues to be a great place to be in the meantime.

The Indicies

The NASDAQ gapped above its 50-DMA at the open and rallied for about a half an hour before ultimately rolling over, dropping back below its 50-DMA and closing near session lows as volume expanded from the day before, adding its 6th distribution day.

The Russell 2000 had been showing some promise until today, when it gapped up at the open with the rest of the major indexes, but ultimately failed at its 10-DMA, before plummeting into the close and closing well back below all of its moving averages.

The S&P 500 gapped above all of its moving averages at the open and rallied for about a half an hour before ultimately rolling over, falling below its 50-DMA and closing near session lows as volume on the NYSE expanded from the day before, adding a 5th distribution day to its count.

The DOW gapped up at the open along with the other major indexes, but it too rolled over, sold off on heavier volume and finished near its low for the day, although it was the only major index that managed to close above its 50-DMA, if only by a hair.

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October 2, 2019