As the end of July approached, the market, finally, seemed to be headed for an overdue correction. Instead, it found support at or near the 50 day moving average the first week of August and began to rally. Unfortunately, volume failed to materialize as the indices climbed and broke out to new fifty two week and all time highs. This could easily have been forgiven as August rallies tend to be on low volume and have worked in the past, but as traders returned from summer vacations and volume picked up, the indices began to churn, get distributed, and stall. The NASDAQ, the lead index has suffered two, well above average and the highest volume since the rally began, distribution days in the last five days, while the DOW and SP 500 have suffered four and five distribution days, respectively, in the last ten days. The small caps which led the market to the downside, failed to follow the other indices into new highs and quickly came under distribution as it squeezed back above its fifty and two hundred day moving averages, potentially setting up a second leg lower.
Large cap growth stocks, Facebook (FB), Chipotle Mexican Grill (CMG), Baidu (BIDU), Biogen Idec (BIIB), Under Armour (UA), and Polaris Industries (PII), gapped out of bases, in well above average volume, on strong earning's reports ahead of the market's rally attempt. Exactly the type of action expected ahead of a strong rally and it appeared that another round of growth stocks were readying to finish up consolidations and breakout soon after. Unfortunately none of these stocks were able to follow through and started to stall or run out of steam (low volume) almost immediately after their respective gap ups. The handful of stocks that did manage to follow through, Bitauto (BITA), Avago Technologies (AVGO), Silica Holdings (SLCA), Emerge Energy Services (EMES), Gilead Sciences (GILD), and Pacira Pharmaceuticals (PCRX), went into climax runs and are starting to break from those highs in heavy volume. The majority of recent breakouts, Navigator Holdings (NVGS), Autohome (ATHM), G-III Apparel Group (GIII), Hi-Crush Partners, LP (HCLP), Gramercy Property Trust (GPT), Netflix (NFLX), and The Priceline Group (PCLN), either failed to follow through, failed, or are on the verge of failing within days of breaking out. Any remaining consolidations are too wide and loose and have lagging relative strength lines.
Two NASDAQ distribution days could be forgiven if it were not for the poor price volume action of the early leaders and recent breakouts, and the growing distribution count for the DOW and SP 500. Traders should have been stopped out of at least some of their bigger winners and ALL of their lagging positions. Any remaining positions should have stops tightened further. As every other short rally this past year, by the time leading growth stocks start to show real damage and market distribution reached dangerous levels, portfolios as a whole give up most, if not all of their gains within the first few distributions days even though traders were able to catch one or two of the bigger winners.
Stay long at your own risk. There are too many major red flags in the market to ignore. At a minimum, get off margin. Conservative investors are better off in cash.