Date: July 20, 2015

Trouble Brewing Beneath the Surface

The more I analyze, the more I don’t like.

The number of stocks participating in this rally has not been encouraging, but Friday’s action along with today so far is becoming eerily similar to that of 1999. Notice I said 1999 and not 2000. Valuations are nowhere near as egregious nor is sentiment showing much greed, not mention frothy. And monetary conditions are certainly not restrictive.

On Friday, on the New York Stock Exchange, there were almost 1000 more stocks declining than advancing with the major indices roughly flat. Today, we are seeing a carbon copy.

On the NASDAQ, it was equally as troubling or maybe even more so because that index saw all time highs. Three days in row saw essentially new highs with more stocks going down each day than rallying. However, keep in mind that the NASDAQ typically has a negative skew on a daily basis.

Sector leadership has been fine, but the majority of sectors are no longer bullish. In fact, the semiconductors closed down slightly on Friday while the Nasdaq 100 index saw fresh 2015 highs, up 1.5% on the day.

Smart money traders went from being net buyers a few weeks ago to net sellers last week. Historically, they take months and quarters to go from one end to the other. Schizophrenic behavior to say the least!

Given the aforementioned concerns, I still do not believe the bull market is over nor do I think stocks are headed for a double digit correction. I do, however, continue to believe that the upside is capped by 500 Dow points and the downside is 1300 points. Not exactly the greatest risk/reward ratio.

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Paul Schatz, President, Heritage Capital