Markets sold off Tuesday with the Nasdaq falling 1.2% and recording a bearish engulfing candle. This is the index of importance and many wondered what would happen as it approached former highs. It was the first to reclaim its 50 day SMA and the other major benchmarks followed, so perhaps it backing off will frighten the S&P 500 and Dow somewhat. The Russell 2000 retreating back underneath its 50 day SMA just one day after recouping it is not a good sign and we spoke last week about the VIX retesting its cup base breakout trigger near 15, and today it did so very firmly at its rising 50 day SMA rising more than 18%, a very good sign for product. One group not getting much conversation has been the weakness in the homebuilders. Of course the threat of higher interest rates is not friendly to the space, but there have been some outsized losses within. Names including DHI LEN MTH and TMHC are lower between 19-20% from most recent 52 week highs nearing bear market territory. The ITB has made little progress with any strength following the selloff earlier this month and has behaved very poorly following a bearish engulfing week ending 1/26. The ETF put on an impressive streak higher 18 of 21 weeks ending between 9/1-17-1/19 before it recent softness. Even periphery plays have been noticeable laggards with TTS and JELD off by 76 and 24% respectively.
Looking at individual groups there was very little for the bulls to talk about. The selloff was broad based with the financials acting the best with the XLF CLOSING lower by 1%. It came near the round 30 number, a level which has seen only 4 CLOSES above recently and is a level which gave the fund headaches dating back to the spring of 2007. The lagging energy space with the XLE is trying for a third consecutive up week with the last 2 trading in a very narrow range and well within the confines of the 8% weekly slump ending 2/9. Today the ETF was rejected at the round 70 number where it had problems climbing above last November and early December too. Near the bottom of the leaderboard were the staples and utilities with the XLP and XLU dropping 1.3 and 1.6% respectively and the worst performer on the session was the cyclicals falling a tidy 1.6% via the XLY recording an ugly bearish engulfing candle.
We are big believers in relative strength and therefore we must be on weakness as well. We have seen a big move off the recent lows and it could be a potential red flag if a stock did not participate. Price reveals plenty of information and below is a great example with HOG and how it was presented in our Monday 2/26 Game Plan. The first thing we see is the stock is underneath its 200 day SMA, and the saying is nothing good tends to happen below that secular line. The line is also sloping lower and that should make one hesitant on making long entries. It did little in the way of attempting a rebound and that demonstrated shortcomings. The stock is now 28% off most recent 52 week highs and looking at its potential first 3 week losing streak, down 2.2% so far this week, since August of last year. It is now flirting with the breakdown trigger and keep a close eye on this name to see how it responds following the possible breakdown.