While the “stock market” continues to flirt with new records, there’s turmoil under the surface. High-flying social media companies Twitter and LinkedIn fell hard in late April, and now recent IPO Etsy, an online marketplace for arts and crafts, is down 50% since going public (8% of that today).

Bull markets don’t end all at once. Generally a few egregiously-overvalued sectors blow up first and are dismissed by most observers as aberrations. Instead, they turn out to be a sign of things to come.

In the previous decade’s bubble it was subprime housing that led the way, while being initially characterized by experts as too small to matter. Click here for Ben Bernanke’s ongoing attempts to convince the world to relax and ignore housing’s problems.

This time around we of course won’t know until after the fact which sector is the canary in the coal mine. But these epic fails in the bubbly social media/online marketplace region of tech certainly look like viable candidates.

So…why these companies at this time?

• They are stock issuers rather than buyers. That is, they don’t have the ability or inclination to borrow huge amounts of money to buy back their own stock, as can, say, IBM or Apple. So their valuation is left to actual market forces to determine, and being priced for perfection, anything less than that leads to a quick, brutal revaluation.
• The network effect may not be as powerful a force in these markets as some believe. In a nutshell, the network effect is the tendency of an online company’s value to rise along with its customer base. The more people who use Facebook, for instance, the more powerful and valuable it becomes for prospective new users. So the strong tend to get stronger. But that may not be the case in a world where everything is mobile and new smartphone apps are launching on a daily basis. Kids tend to flee their parents, so mainstream acceptance of an online service can be the kiss of death. Which means such companies have a very limited lifespan.
• Why now? Corporate revenues are falling. Due to share repurchases this negative trend hasn’t translated into falling earnings per share, but it’s just a matter of time. As more and more investors get this, their mood shifts from euphoria to caution. Cautious people tend to shy away from speculative situations, and tech trading at huge multiples of revenue certainly qualifies.
• Who’s next? Well, Uber is looking pretty rich. See Uber is now valued higher than 80% of the S&P 500, closing in on GM and Ford

So that’s the tech tank story. Now we’ll see whether it becomes the story of the market in general.

Abnormal activity out of predictive chart patterns often leads to market beating trends. This week, I ran the Abnormal Breaks Market Scan for the US and Canadian markets and found a couple stocks that have good potential to move higher in the weeks and months ahead.

STOCKS THAT MEET THAT FEATURED STRATEGY

1. NES
NES has been building an ascending triangle pattern for the past three months and broke out from that today with strong volume. Support at $3.60.

2. TAXI
TAXI has been stuck under $10.80 for five months but broke through that resistance level with strong volume today. This move also breaks the long term downward trend line on the 3 year weekly chart. Support at $10.45.

….read Tyler’s Weekly Commentary HERE

Briefly: In our opinion, speculative short positions are favored (with stop-loss at 2,140, and profit target at 1,980, S&P 500 index)

Our intraday outlook is bearish, and our short-term outlook is bearish:

Intraday outlook (next 24 hours): bearish
Short-term outlook (next 1-2 weeks): bearish
Medium-term outlook (next 1-3 months): neutral
Long-term outlook (next year): bullish

The U.S. stock market indexes gained 1.3-1.5% on Friday, retracing their recent decline, as investors reacted to better-than-expected monthly jobs report release. The S&P 500 index got closer to its April 27 all-time high of 2,125.92. The nearest important resistance level is at around 2,120-2,125, and level of support is at 2,100, among others. There have been no confirmed negative signals so far, however, we can see negative technical divergences:

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Expectations before the opening of today’s trading session are virtually flat, with index futures currently down 0.1%. The main European stock market indexes have been mixed between -1.3% and +0.3%. The S&P 500 futures contract (CFD) trades within an intraday consolidation, as it fluctuates following Friday’s rally. The nearest important level of support is at 2,100, and resistance level is at 2,110, among others, as the 15-minute chart shows:

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The technology Nasdaq 100 futures contract (CFD) follows a similar path, as it fluctuates in a relatively narrow trading range. However, it remains relatively weaker than the broad stock market. The nearest important level of resistance is at 4,450-4,460, as we can see on the 15-minute chart:

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Concluding, the broad stock market has managed to retrace most of its recent move down on Friday, as investors reacted to economic data announcements. There have been no confirmed negative signals so far. However, we continue to maintain our speculative short position (2,098.27, S&P 500 index), as we expect a downward correction or an uptrend reversal. Stop-loss is at 2,140, and potential profit target is at 1,980. You can trade S&P 500 index using futures contracts (S&P 500 futures contract – SP, E-mini S&P 500 futures contract – ES) or an ETF like the SPDR S&P 500 ETF – SPY. It is always important to set some exit price level in case some events cause the price to move in the unlikely direction. Having safety measures in place helps limit potential losses while letting the gains grow.

Thank you.

“A major reason for the rally was a surge in European equities as a result of the Tory win in Great Britain”

DOW                                          + 267 on 1900 net advances

NASDAQ COMP                            + 58 on 700 net advances

SHORT TERM TREND                    Bearish

INTERMEDIATE TERM TREND        Bullish

STOCKS: Everyone was buzzing about the non farm payrolls. Good enough to suggest strength in the economy, but not so strong as to goad the Fed into raising rates. We think that this is nonsense. The economy is not strong. More on that in the interesting stuff section.

A major reason for the rally was a surge in European equities as a result of the Tory win in Great Britain.

GOLD: Gold was up $5. Gold investors were encouraged by the non farm payrolls.

CHART: The advance -decline ratio was over 3.0. When this happens, we normally have further to go on the upside.  On the other hand, the S&P 500 is in heavy resistance. We’ll keep a close eye on this.

BOTTOM LINE:  (Trading)

Our intermediate term system is on a buy from Feb. 20, 2015.

System 7   We are long the SSO  from 132.06. Stay long through Monday.           

System 8   We are in cash. Stay there.               

GOLD  We are in cash. Stay there.     

News and fundamentals:  Jobless claims were 265,000, less than the consensus 280,000. On Friday we get the dreaded non farm payrolls.  

Interesting Stuff  Wages were higher by 2.2% year over year. This is anemic and is why we aren’t all that impressed. These are still not good jobs. The good factory jobs have been sent to places like China and now they are talking about another trade deal to ship even more jobs out of the country.

TORONTO EXCHANGE:Toronto gained 81.

S&P/TSX VENTURE COMP: The TSX was up 5.

BONDS: Bonds moved up slightly.                   

THE REST:   The dollar also was up slightly. Silver and crude oil were both higher.      

We’re on a sell for bonds as of April 22.                   

We’re on a sell for the dollar and a buy for the euro as of April 28.                    

We’re on a buy for gold as of April 28.                      

We’re on a buy for silver as of April 28.                       

We’re on a buy for crude oil as of April 29.                           

We’re on a sell for the Toronto Stock Exchange as of May 6.    

We’re on a sell for the S&P\TSX Venture Fund as of October 30.

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