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10/8/2014

US Equity Market Review
Summary
As illustrated in the charts to follow there is a consistent theme UGLY ! Most charts have either broken
trend and support, or are now testing critical support. The smaller the cap size, the riskier the asset class,
the deeper the deterioration. Its classic de-risking. Given most investor portfolios tend to hold large well
known names, there hasnt been much griping yet - as the S&P 500 has, at least up until the last few days,
been mostly spared. However, that is changing now as sellers climb up the quality ladder.

When looking at the current technical picture, one has to put some context around the recent action.
Recent weakness is coming on the heels of most markets enjoying robust rallies, with nary a correction since
December of 2013. These extended rallies, fueled by excessive margin use and mutual fund managers having
expended almost all their cash are now breaking down faster than Lindsey Lohan at a rave ! Thus, markets
are more vulnerable to a deeper sell-off since buying liquidity has been eroded.

That said, we think the breakouts to all time highs over the last 6 12 months may suggest a secular bull
market is at hand, however, cyclical corrections can and will occur during secular advances. Additionally
they can sting pretty good ! For now, and in our opinion, it makes sense to be defensive and let everyone
else get banged up in the storm. We prefer keeping dry powder as the evidence suggests the path of least
resistance is down.
FusionIQ Technical Scoring Ranks
If there is one data set that bothers
me more than any other, it is the
massive deterioration in number of
stocks/ETFs in FusionIQ ranked 70
or > (light green bar) over the past
3 months.

As illustrated to the left, approximately
4,500 issues were ranked 70 or > just
3 months ago, and now its just a little
over 2000. Couple this data with
record levels of margin use, a
problem as stock prices go down, and
low mutual fund manager cash levels
and it appears the market is breaking
trend with a lot of potential supply in
the market.

While we would argue the market may
be in a secular bull over a longer
dated time, however there is nothing
saying a painful pullback/retest of the
breakout spot cant develop first.

SPDR S&P 500 ETF (SPY) - Daily Chart
The S&P 500 ETF SPY is testing a very valid trend band (green
lines and arrows). Additionally, the key support band near 1,900
(gray band) is also being closed in on (this corresponds to 1,900
on the S&P 500).

The more something is tested, the more likely it is to eventually
break. We think this time the S&P 500 has run out of luck.
Russell 2000 ETF (IWM) - Daily Chart
The Russell 2000 ETF IWM broke its uptrend band (green lines) a
few weeks ago and has continued to drop. Yesterday, the ETF
broke below its key support band near 108.50 107.50 (gray
band).

While oversold bounces can occur at anytime, this looks like real
selling and a real break. Path of least resistance remains down.
Powershares NASDAQ 100 ETF (QQQ) - Daily Chart
The Powershares NASDAQ 100 ETF (QQQ) broke its up trend line
(green lines) and a support band (gray band).

Next major support is not until 92 (purple band).
NASDAQ Transportation Index - Daily Chart
We like to look at the NASDAQ Transportation Index as it is much
broader with 57 members, versus the more widely followed Dow
Jones Transportation Index, and it 20 members.

As illustrated, this index has broken trend (green lines) and
support (red band)
SPDR Mid Cap 400 Trust (MDY) - Daily Chart
Like its small cap brethren, the S&P Mid Cap 400 ETF MDY has
busted its trend already (green line).

Like its small cap peers, the path of least resistance for mid caps
is down as well.
SPDR KBW Bank ETF (KBE) Daily Chart
The KBE Bank ETF (KBE) is heading for a major support test (gray
band), after breaking several trend lines (green lines).

iPath S&P 500 VIX (VXX) - Daily Chart
The iPath VXX ETF recently broke a downtrend (red
lines and arrows) and is now closing in on a breakout
near $33.

Market Vectors Oil Service (OIH) - Daily Chart
OIH, this is what can happen when you disregard a trend
line and support break a fast melt off !!

German DAX Index (DAX) - Daily Chart
Checking in on Europe another market, another key
trend line test (green line).