Bulls Eager to Buy ... Again!
Consumer Discretionary sector has outperformed the overall market, both since the bull market began in March 2009 and also over the last calendar year of 2013. However, unlike previous corrections throughout 2013, this one has now impacted leading sectors like XLY the most. The uptrend line from November 2012 has been broken and the relative under-performance against the broad market is becoming noticeable.
Chart 1: Discretionary sector has been the darling favourite of investors
 Source: Stock Charts (edited by Short Side of Long)
Nevertheless, bulls (which have become accustomed to buying dips for over 14 months now) seem too eager to buy what looks to be yet another dip. However, many individual stock charts are breaking down and looking rather ugly. Furthermore, the overall index is suffering from poor breadth readings. In other words, it seems to me that the trouble just seems to be starting.
From a contrarian point of view, the best buying opportunities are usually witnessed during periods of increased volatility, high bearish views on the markets and oversold technical readings. Last time we saw such an event was between August and October 2011. Today, we are not even remotely close to something like a real buying opportunity.
Nonetheless, traders will trade either direction, unlike investors who buy or sell the long term trends. From the traders perspective, the market is now close to becoming oversold. Furthermore, the recent sell off registered up to 20% of the S&P 500 at RSI levels of 30 or lower, also signalling a short term oversold event. A bounce or even a relief rally could (but doesnât have to) occur at any time, but be very carefully as volatility is now on the rise again.
Chart 2: S&P 500 is becoming oversold from the short term perspective
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Source: Index Indicators (edited by Short Side of Long)
Copyright Š Short Side of Long
