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Crosswinds Hard to Ignore Despite S&P All-Time Closing Highs

John Darsie

The Dow and S&P both made new all-time closing highs again today, but the swirling winds are getting harder to ignore at this point. The action remains very disjointed--I guess you could call it rotation--and when you survey the charts it's hard to find what is really pushing this market higher. The Dow has outperformed recently, potentially the result a flight to safety. At this stage, in my opinion the short side is becoming more compelling than the long side from a risk-reward perspective. That seems silly to say with the major indices at all-time highs, but there are some warnings signs under the hood.

The two index ETF's that are flashing the brightest warnings are the Transports (IYT) and the Russell 2000 (IWM). Yesterday we noted weakness in both sectors as something to keep an eye on, and again today they displayed relative weakness. Both ETF's opened higher with the market today, but were the first to go negative. Both IYT and IWM are sector ETF's that bulls like to see lead the market to confirm Dow Theory and risk-on sentiment, respectively.

Recent tech leaders LinkedIn (LNKD) and in particular Netflix (NFLX) are weakening considerably. NFLX has been trading within an upper level base for weeks, and today it broke below that upper level floor and lost its short-term moving averages. You always have to be careful shorting stocks with an already high short interest, but NFLX seems like it has run out of steam.

On Thursday I did the Morning Call with Brittany Umar and we went over a group of value-type stocks that I thought still looked compelling for continuation to the upside. My favorite pattern in that group--which was also highlighted in last night's Off the Charts newsletter--was Proctor & Gamble (PG). The stock had put in a tight upper-level base, and today busted out on its way to a 1.62% gain.

The healthcare stocks opened up huge today after news that the government was dropping its plans to cut payments for private Medicare Advantage insurers. The news was especially big for a company like Humana (HUM), which derives two-thirds of its revenue from its Medicare Advantage business. HUM closed up 5.45% on the day despite closing well off its highs of the day. United Healthcare (UNH) also saw a big boost from the news, breaking out a macro pattern that I highlighted last week. The stock finished up 4.70% on the day, also well off its highs but above the morning gap.

The financials actually held up well after the gap up today and were quiet, but I continue to like Morgan Stanley (MS) as one of my favorite short set-ups out there. The stock has a gap from mid-January that looks like it wants to get filled.

Overall, I think despite the all-time highs and firm uptrend in the market, there are enough warning signs that you should consider putting on some shorts to balance your book. In today's Morning Call, Scott and Brittany went over some compelling short set-ups. As a trader you always have to look for the best risk-reward scenario, and right now I can't get excited about many chart patterns out there.

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*DISCLOSURES: No relevant positions