Everything seemed perfectly aligned for the bulls. In March, slowing momentum on the bulls' side was a growing concern, but the consolidation that took place in the latter part of March and throughout April relieved that concern, so technically it appeared the bulls might resume control of the action. Take a look at the negative divergences that had become problematic:
The slowing momentum was obvious. But while the short-term looked dicey, the longer-term remained strong. Here are those same charts, but on a longer-term weekly basis:
I'll be honest. I was dead wrong last week. With the unwinding of those negative divergences and the MACD back near centerline support across all of our major indices, I was looking for a rebound last week, possibly to fresh 52 week highs. Historically, the first week of a calendar month tends to be quite bullish as well as new money hits the Street. Unfortunately, the slowing global economic picture was felt here at home. After a solid start to May on Tuesday of last week, the disappointing jobs and manufacturing data took its toll with a fairly significant selloff taking place throughout the balance of week. Anyone else hearing the whispers of QE3? I've said throughout 2012 that we're going to get it because of the way the treasury market has behaved. Based on the data last week, it's getting closer, not further away.
Clearly, the market's "signals" are mixed here. The long-term charts continue to suggest the 2012 rally is not over, but the weakness last week was a stark reminder of how quickly things can change. For me, it's a fun time in the market because we've been inundated with earnings reports - some quite stellar - and I see the potential emergence of new leaders. While my focus is ALWAYS on technical indicators for timing into or out of stocks, I'm still a CPA at heart. I spent close to 20 years auditing companies so it wouldn't be prudent for me to completely ignore the fundamental data from companies that we see each and every quarter. Therefore, I like to combine my fundamental analysis around earnings time with my strong desire to follow the money flow. That's what I refer to as "cherry picking" the best companies in order to find those companies that will outperform.
Let me give you a recent example. In mid-January 2012, Tractor Supply Company (TSCO) raised its earnings guidance and the stock hasn't looked back. Check this out:
TSCO was identified as a "Diamond" selection at Invested Central in the first quarter because of its combination of strong fundamentals and strong technicals. This is a process that I use each quarter to find those "Diamonds" in the rough. Given the state of the current market, with mixed signals, trying to find the best of the best is probably not a bad strategy to stay invested while at the same time being careful with your trading dollars.
I've written a brief paper on the different types of tradable stocks that you can find during earnings season and how I use StockCharts powerful scan engine to help me identify these stocks. I'll be happy to send you a free copy. Simply CLICK HERE to leave me your e-mail address and I'll ship it out to you this weekend.