Major averages fell Friday on higher, above average volume. Earnings continue to falter especially among big cap technology names, and overall, S&P 500 earnings continue to slow. This has marked major market tops in the past such as in 2000 and 2007. This time, however, the wildcard is QE which could continue to push markets higher. That said, QE in and of itself seems to lack the thrust of previous years such as 2009-2014 when QE 1, 2, 3 and Operation Twist were launched. The difference now is that QE is coming from global central banks and not the US Federal Reserve. And the negative interest rate environment in Europe and Japan does not seem to be helping to resuscitate their economies, but instead is creating imbalances in vehicles such as pension and insurance funds.
Indeed, the current rally which began mid-February could be nearing its end as major indices near old highs. Sharp rallies were observed in late 2014 and late 2015, both which fizzled out once the major averages approached old highs.
Further, the pronounced number of distribution days could lead to further selling. A number of big-stock NASDAQ names, such as AAPL, NFLX, GOOG, and MSFT, have weakened over the past two weeks, and this type of action was coincident with tops seen in last July and early January of this year. If the selling among these big-stock names spreads further, it will likely have negative implications for the general market.
Controlling risk is the most important rule in investing. Should the current correction continue, keeping stops tight and restricting buys to only the best risk/reward entries is wise. But should QE create merely a shallow floor in the current correction with a resumption of the uptrend, new buy opportunities should emerge in the form of pocket pivots and buyable gap ups. Employing the various buy/sell strategies we have discussed in weekend updates with members is key in this QE-manipulated environment.