Stock Market Early Morning Insights – June 29, 2016

There is a great deal of confusion as to market direction. After the strong, panic selling on Friday and Monday, the stock indexes bounced on above average volume.

Yesterday I mentioned that Ian’s Phoenix signal was often a sign of capitulation, and so far, that is exactly what happened. When indexes moved to extreme levels in a short period of time, more often than not, traders and institutions step in to buy the perceived bargains. The question, of course is if the indexes will bounce all the way back and move higher as if nothing out of the ordinary had happened.

Ian’s chart had another reversal and generated both a Eureka, and a Little Kahuna, with both indicators indicating strong buying and strong internals. You have to remember one thing about these indicators: they are snapshots of what happened that day, and there’s no guarantee there will be a follow-through. In the past four trading days we have a Eureka, two Phoenixes, and another Eureka yesterday. The Bollinger band indicators, the Kahunas, generated a buy signal, a sell signal, and now another buy signal. Talk about confusion. Indicators have no predictive value contrary to popular thinking; the only reflect what has happened.

The only way I know to avoid this is to watch the tape to see what it is telling us. On Monday, the VIX fell even though the stock indexes close near the daily lows. This was the first indication that there may not be a follow-through to the downside. And then yesterday, the indexes gapped open, shorts had to cover and the buying spree was on. I would be very surprised if the indexes form a V bottom with all the damage that occurred on Friday and Monday, but anything is possible.

The lesson is not to get locked into an opinion because that often turns into hope that we will be correct and the market will conform to what we think it should do. If we have an inflexible opinion, we will try to trade contrary to the tape, or we will do nothing. Doing nothing in a market like this should be done by choice, not by freezing because we don’t have a plan.

I was surprised when I ran the top 50 GIR report to see the list dominated by REITs. If traders and investors are so confident that this market is going straight up, I doubt if so much money would be flowing into what I consider defensive stocks, such as REITs. There was bottom fishing going on in the Biotech and Specialty Pharma stocks which are among the weakest groups. The Biotech index was trading outside the Bollinger bands, but worked its way back inside the bands yesterday on relatively heavy volume. Also, money flowed back into Semiconductor stocks and into the stocks that dominate the S&P indexes. The brokerage and institutional investor stocks seem to have taken an exceptionally hard hit, and there was not much relief yesterday.

Stock index futures are up another two thirds of a point this morning, probably due to higher oil prices. The Exploration and Production stocks were strong yesterday as oil bounced back, and it looks like there will be a continuation of this when the cash market opens.

The stock I mentioned last week, MEET, broke above resistance yesterday, and was up 11.78% yesterday on heavy volume. This is not a recommendation, but a stock to watch. It should not be chased on the impulse move, or at least, I would not chase it. Here is another stock for your watch list: AMPH. It broke past resistance yesterday on heavy volume, but it is approaching another resistance area. If it can break above $18.30, it may have a nice run. It is a Box 7 turnaround stock.

STOCK MARKET EARLY MORNING INSIGHTS

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