Selloff of Leading Stocks

After a strong rally for several months leading stocks began selling off in high volume in late April. Leading stocks are those that have superior fundamentals and have been outperforming the broad market on a relative basis during the recent rally. Volume refers to the number of shares traded in a day, relative to the previous trading day. High volume, either up or down, is a sign that institutional trading is controlling the stock.  By May 4th the selling pressure was sufficient for us to determine that the market is now in a correction.

Since that change in status, the major indexes continue to waffle back and forth as if treading water. The Dow and the S&P 500 are both down about 3.5% from their April 29th high. That may not seem like a lot to be concerned about, but it is the subtle changes under the surface that cause us to be cautious. We have observed that on days when the market is up, trading volume is low, and on days when the market is down volume is high. Institutional investors move markets and when they are unloading stocks it is a cautionary sign.

Finally, this week sector rotation is at work. A few months ago, technology, oil, agriculture, machinery and tools and commodity related stocks were leading the pack. Now the stocks showing strength are in defensive sectors such as medical, utilities, and consumer staples.

We are not predicting a further decline. Predictions are a dime a dozen out there so you don’t need to hear predictions from us. Rather than predict, we prefer to follow the market. We have confidence in our indicators and we believe there is evidence that caution is prudent right now and we are watching the market very closely.

Our strategy for the past few weeks is to protect accounts by increasing cash levels. We do this by taking profits as well as selling positions that are exhibiting weakness on a relative basis. The added cash provides a cushion against the possibility of further price decline in the market, and it also gives us money to buy when opportunities present. We believe it is too early to buy back in right now. When buyers return to the market and demand is in control it will be time to add new positions for the next rally.

This report is a publication of Guelich Capital Management, LLC. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.

 

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