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Sunday, February 15, 2015

Internal Conflict

 Any man who can drive safely while kissing a pretty girl is simply not giving the kiss the attention it deserves.                                                                                                                                                                 -Albert Einstein

Ever since summer of 2014, I noticed a very disturbing tendency of my general list. Many stocks I follow started to underperform the market as a whole, and winners got smaller than losers at the same time. Basically, when I guess right - stock advances 10-20%, but when something falls - it collapses by 30-50% and fast. I've been fortunate to avoid disasters lately, but its getting harder to pick the spots.

Noticeable divergence is underperformance of NYA (NYSE Composite Index) versus other broad indexes, as NYA is still under the peaks made in July and September 2014, while S&P500 and Nasdaq already made new highs. I follow NYA closely, because its a most broad index of 'real' stocks due to NYSE listing requirements - price over $1, income from continuing operations, stringent reporting, etc. It would be beneficial to see NYA resuming its leadership role, since breaking of last years highs will also trigger a huge Inverse Head-and-Shoulders continuation pattern, with target somewhere in 12000. Similar formation is also apparent in EMW (Wilshire 4500) and IWM (Small Caps), but S&P500 looks different.

I remain in owe of miscreants from McGraw Hill and the incredible results they achieved with S&P500 Index. SPX is sort of self-rebalancing large cap growth index, superior to anything out there so much so that active managers where unable to beat it for years. People commonly refer to it as 'market', but its an erroneous assumption. All stocks are 'the market', SPX is just a collection of 500 biggest and best stocks, weighted according to some magic formula and continuously changing composition. The effect of these 500 stocks is evident in difference between WLSH (Wilshire 5000 - all US equities index) and EMW (Wilshire 4500, or Wilshire5000 without S&P500). EMW has been leading since the beginning of this year, which is not to be taken lightly. All these indexes are capitalization weighted, therefore it would take a really big advance in smaller issues to overpower a lackluster performance of mega-caps. I think its an important development, and may lead to continuation of this bull market due to 'rising tide lifts all boats' phenomenon - the one that we have not seen lately.

I don't do market forecasts, nor I rely on predictions in making investment decisions. Index interpretation is even more confusing and most misleading of all, because of index nature - an approach based on avoidance of technical or fundamental analysis. On Friday, February 13, 2015, as most averages where making new all time highs, I decided to look at 'The Market' thru some simple Finviz scans.

Today, Finviz lists 7064 issues that trade in USA, including foreign and domestic stocks, ETF, leveraged and inverse instruments, bond funds and god knows what else. I wanted to see active, tradeable stocks only (ex-ETF's), price over $5, average volume over 300k, regardless of fundamentals. Scan turned up 2093 issues, or slightly less than 30%. This is what I found inside these 2 thousand stocks:
- On a day when broad market indexes where making new highs, only 185 stocks (8.8%) where at new 52 week high; only 368 (17.5%) where 0-3% below.
- 674 stocks (32.2%) are 20% or more below 52 week high; and 148 (7%) are 50% or more below.
- 69% are above 50 day moving average; 62.6% are above 200 day ma
- number of stocks near 52 week low is negligible 1-2%

These numbers are hardly bullish, make me very concerned and constitute a serious internal conflict, IMNSHO

Born under a bad sign
Been down since I began to crawl
If it wasn't for bad luck
You know, I wouldn't have no luck at all
-Albert King

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