Rotation Report: Hit the Fan

To end the week we saw some carnage not seen since the last bear market. Friday, sectors and groups across the board crashed into and through key supports. Given the excessive downside breadth and panic reads sentiment measures, it's an interesting bounce setup short term. However, the market is just breaking down from a 5 month top.

I suggest reading JC Parets piece on the major fibonacci extension ratio in play in the S&P 500. This extension is a level where bear markets can begin. It pays to be protective.

We don't have a single clear, in-your-face reason for investors to sell (think about when we had Greece to blame). If we can attribute a cause to the sell-off, it's easier psychologically for trapped longs to sell. Instead, it seems we have confusion with a confluence of factors (china, oil, the fed) and confusion tends to lead to more hope and less action.

The main attraction to buyers here seems to be the hope that this is just a big panic out of the recent range. This decline is too violent for that and the big picture suggests a continuously deteriorating environment.

So why am I even talking about buyers? As you know, the downside momentum in emerging markets and commodities has been RELENTLESS. The U.S. markets are just now getting a big whiff of that selling pressure. It's times like these are when 'trader bros' become 'I used to trade bros'. We have to be careful.

I made a few important points on stocktwits Friday Morning. Remember to read from the bottom up.

After many years of the same conditions, we become wired to react to them. Then, markets change and that completely blows up in our face. Guess what, all sorts of algorithms are programmed the same way. It's another reason to be fearful of further STRONG selling. The key is to just know when the environment has changed.

After the mega bull run and the massive trading gains seen it's easy to get cocky. We tend to think we can trade accurately trade short term bounces, but that will not be the case!

The whole point is things have just NOW broken down from long term formations. Early is wrong and it can be painfully wrong. If everybody is looking for a bottom or to play a bounce, you're not going to find it...

Thoughts aside let's stay agnostic for the chart/group analysis

Say you think the market is near a low and you want to buy an index. Which do you buy? The Small Caps may be the way to go. Looking at IWM, we see a test of the 100 week moving average. This average has been an excellent area to buy over the last four years. Plus, we've already seen a double digit correction.

Equal Weight S&P 500 has ripped during this collapse. It seems like a massive positive divergence, but we can't act on this alone.

Small caps relative to the Dow keep making higher lows and highs. Another sign we want to stick with the US?

The NASDAQ to Long Term Treasuries ratio continues to megaphone out and test key support.

Groups

Interestingly Energy is starting to outperform Consumer Discretionary. It's not really that surprising when you consider gas prices. I'd be real wary of the consumer discretionary group here though. More on that later.

The home building space is showing strength across the board. Continued strength may be a sign the market rotation cycle is starting all over again. That'd be bullish in my book

Oil Services are reaching key support zones.

Alternative Energy is near a major support zone. Is this a double top? It's not like any of these businesses are really producing positive cash flow. Of course they could get dumped hard on a further correction, but maybe it can bounce here.

Apparel Retail saw a nasty outside week while snapping long term channel support. Note shorter term support hasn't given way yet to confirm the breakdown.