It’s been a while since I ran down a few charts and those that follow are of major significance in my book so let’s take a look.
First up is the Philadelphia Bank Index. The numbers in red are DeMark sell signals (9 is a completed setup and 13 is a completed sell signal). The DeMark 9-13-9 is, at the very least, a red flag. Technically, to my eyes, it looks like the banks have broken down out of their 2012 uptrend and are now testing the break – usually a great sell setup in itself.
This next chart is the same index on a weekly time frame. While the major indexes have regained most of the ground they lost during the financial crisis the banks are clearly nowhere near doing so. This pennant pattern on the chart usually resolves in the direction of the trend that proceeded it (lower).
Below is a daily chart of the Russell 2000 Index which tracks small-cap companies. I love watching this index because I feel it is a good gauge for the overall health of the stock market. When small companies are trading well it tells me that the breadth or participation of a rally is healthy and vice versa. The clear head and shoulders pattern on the chart below, combined with the completed DeMark sell signal at the end of March (13 on the chart) suggests the small caps are at risk of giving up the rally.
Finally, taking a look at the weekly chart that goes back to the 2009 bottom, the small caps are still at risk of forming a very large head and shoulders pattern that would resolve about 40% below current prices.
I’m not calling for another epic bear market along those lines. I’m just saying that after the phenomenal rally we’ve had year-to-date it may pay to zig (get more conservative) while everyone else zags (counts their profits).