Market Not Ready to Break Down

The first quarter of this year represented a strong showing by the S&P 500; one of the strongest quarters in some time. You could have fooled us. This market has not been an easy market to navigate. Every up day seems to have been followed with a distribution day, especially over the last few weeks. The trend is still up but we have to wonder if the trend is being used by smart money to unload their positions. Case in point: the SPY broke out above overhead resistance during the middle of March. At the time we remarked that the breakout was not to be trusted due to the lack of volume. Now over the last few days every attempt to rally out of this breakout has been shot down mid day leaving a series of selling tails on the daily candlesticks. Each mid day rejection and poor close represents a day when sellers used the rally attempt to unload their positions. This weekend we highlighted the fact that the chip sectors was trading at support and providing a weekly buy signal. We may yet see a rotation back into tech that is validated by a strong move in the chips. As of today however we just racked up more evidence that something is not quite right below the surface of this market. INTC sure isn’t helping the situation in the semis either. We don’t want anyone to panic at this stage as this situation we are describing is still playing itself out and the final outcome is not carved in stone. It remains a good idea to tread lightly in this market and stay hedged in the commodities sectors, which are acting much better at this stage than the general market is. Despite the weak close yesterday we believe that those who aggressively shorted yesterday’s decline might be in for the same type of frustration that longs experienced after buying yesterday’s open. From what we can decipher from scans, yesterday’s late reversal was just more market noise and not necessarily the final nail in the coffin that is going to lead to a waterfall type slide that bears are hoping for. More likely we will continue to experience more choppy trading this week that is going to frustrate all but the most patient of participants. Ultimately this action is going to lead to a larger correction. We just don’t believe we are there quite yet.