After a healthy bull run since the beginning of this year, the market's uptrend
is showing signs of stalling in the intermediate term. The action in the major
indices, leading stocks, and my own P and L, tell me that the tenure of the
market may be changing in the intermediate term. Faced with the evidence I
outline below, higher levels of cash, and a defensive posture is probably
prudent until the market's uptrend shows signs of resuming.


The Major Indices

All of the major indices have suffered high levels of distribution in recent
weeks. Our leading index -- the Nasdaq Composite -- has approximately eight or
nine distribution days of its recent high in late March. Indeed, the Nasdaq has
not flashed one above average volume day since February 28. The other major
indices have similar amounts of distribution. Some of the broader indices that
have lagged much of the rally -- like the NYSE composite -- trade well below
their 50-day moving averages, while the s and p 500 and Nasdaq are just slightly
below those important support levels and looked poise to break below those
areas.. In addition, after trending upwards in quiet fashion since January, the
major indices have exhibited volatile up and down action in recent days that can
be symptomatic of a market that needs a rest after a long uptrend.

Faced with this evidence, a cautious tone is certainly prudent, until the market
can show signs of accumulation in the form of a new follow-through day.

Leading Stocks

While most of the leading growth stocks have showed resilience in the face of
distribution in the broader market, some early warning signs are flashing that
the correction could deepen.

Leader AAPL has shown high levels of distribution off its recent high. Last
week, AAPL closed at the low end of its weekly range on its biggest volume week
since its original breakout back in January. The stock is currently sitting on
its ten-week moving average, and reports earnings tomorrow, so this action this
week should give us an important clue about where the market is heading in the
intermediate term.

PCLN is still sitting comfortably above its ten-week moving average, but similar
to AAPL has flashed some high levels of selling volume off the recent highs. A
feeble rally earlier last week occurred on lighter volume. While this stock
still looks in good shape longer term, the high levels of distribution off its
recent high need to be monitored closely.

KORS, recent broke below its 50-day moving average on high volume, and has shown
little inclination to get back above that line. The chart is plagued with high
volume down days and low volume up days, and is another sign that the tenure of
the market's leaders have changed. The stock may be forming its first real base
since its IPO, but nevertheless appears to have lost its "mojo" for the time
being.

CMG was distributed off its earnings report last Friday. Like AAPL the stock
closed the week at the bottom of its weekly trading range on it highest volume
since the move began. Given the run up this stock has had, a basing period
and/or correction would be normal, but the recent action may also be a clue that
the market's tenure has changed in the intermediate term.

Other leading stocks have also broken below their ten-week moving averages on
volume including PNRA, TPX and QCOM.

In addition many tech stocks, particularly in the cloud computing area, contain
extremely wide and loose behavior off their earnings reports, including VMW and
FFIV. Such wide and loose action is not indicative of a strong healthy
intermediate bull move.

Not all leaders are acting suspect, and many continue to hold up well for the
time being, including UA, ISRG, and CRM. However for the first time since
January, many leading stocks are flashing some cautionary signs in the form of
high levels of distribution off their recent highs.

P and L

Another area I used to measure market health is my own P and L. After a long
period of progress, if my own P and L stalls and cannot make much progress for a
few weeks, it can provide an internal feedback mechanism that the market's
uptrend is coming to an end. Indeed, if I were to plot my P and L on a graph,
one might say that it has churned at its recent highs similar to many stocks in
this market. This certainly is something I watch and tells me not to press
things and play defense at this time.

In conclusion, the high levels of distribution in the major indices, some
deterioration in leading stocks, and my own P and L, tell me to play defense and
maintain a decent amount of cash at this time. If the correction does deepen,
this should allow new bases to be built and enough fear and negative sentiment
to set the market up for another potential rally later this year. At a minimum,
until I see a follow-through day and a resumption of the uptrend in leading
stocks, I believe taking a step back and playing some defense is prudent.


Please email me with any comments or questions.
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