As we have been saying for weeks, the market is very extended and due for a pullback. It appears, that is exactly what is happening as the major averages and a slew of important stocks (PCLN down over 60pts in 2 days, TSLA down over 40 pts in 2 days, WFM, down -12% today, LNKD down 20 pts in 2 days, just to name a few) are beginning to gag. The major averages and several important growth stocks have turned lower for the day, week, and month. Of course, the always fun jobs report is today which could sway sentiment but at this point, the market looks like it wants to pullback.
The small-cap Russell 2000 which led on the way up did not make a new high just recently, even though the Dow Jones Industrial Average (lagging index) did. That is not ideal. Normally, you want to see leading indices lead, not lagging indices. The Russell 2000 negated its latest breakout (from 10/14) and closed just above its 50 average price line which is the next area of support. For the S&P 500, the next area of support is 1729 (former chart highs), then the 50 day average line near 1707. All this suggests a defensive stance is paramount right now.
From our point of view, the most important driver for the market is QE… Therefore, the fact that GDP topped estimates this morning strengthens the case for the Fed to taper. Hence the big sell off we are seeing. We are still bullish in the intermediate and long term, just think the market got a little ahead of itself and the long awaited pullback is now upon us.