Guest contribution here from reader “Spider Trader”, an institutional trader with several decades of experience trading capital markets around the world. The combination of a skilled technician and a skilled fundamental analyst has the potential to be a dangerous duo.
From “Spider Trader”:
Recovery rallies are almost always led by the high beta sectors of a market. In the case of this economic recovery, think China and global small caps. With China recently topping out and weak action in the small cap Russell 2000 index we are sitting in much the same camp that TPC currently sits in – wait and see mode. For now, the potential double top in the Russell and the overhead resistance at the 50 day moving average serve to validate the underlying fundamental outlook of a stalling economic recovery.
In addition, the recent sell-off that took us below resistance was on substantial volume compared to the recent rally which has been on very low volume. Small caps and high beta names are now exhibiting weakness compared to high quality names in what we view as a sign of a shift in risk tolerance. This could be a sign that the rally is finally beginning to taper off. For now, keep your powder dry. The market will tell us how to plan our next move.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.