Cautious Does Not Equal Bearish

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I had a wonderful visit the other night with a bunch of folks I worked with about 20 years ago at Cowen. About halfway through the evening, I was asked by someone who doesn't read my column if I was bullish or bearish. My response was "I'm not bearish." Then someone who does read my column chimed in that I've been cautious for a month now. And that's absolutely true: I have been cautious, yet I am not bearish.

So I thought this might be a good day to explain why I am not bearish -- yet why at the same time I find it hard to be a raging bull and thus keep calling for a correction. We do keep getting corrections that last a few days and then carry on higher, but I never seem to think those corrections are enough.

Last week I explained how breadth looked great, but when we backed out all of the bond-related stuff, breadth was still good (that's bullish) but not as fabulous as the headline numbers would have us believe. That was also the purpose of explaining the new highs in my column Monday. These are not negative numbers (thus the reason why I'm not bearish), but they are not as great as they appear. That's why I can't throw caution to the wind and be a screaming bull.

Now the market has made a higher high and has the oscillator at a lower high. That is a negative divergence, which should be another factor that tempers my bullishness. And that might just be what leads us to a better correction.

But let's get back to why I was bullish in March but find it hard to be now. To that end, I'll share a few charts of some of the stocks I own, each one vastly different in appearance.

Nike

Remember when the S&P 500 made a low around 800 back in mid-February? At the end of January, it had come down to the 840 area and seemed to be trying to hold, but then it gave way and was testing 800 again by mid-February.

Now, check out the chart of Nike ( NKE). In late January, it was around $43 -- and it was still $43 in mid-February. By the time the S&P 500 broke 800 in mid-March, Nike was on the verge of breaking out of a base, well off that low of $43. When I talk about positive divergences at the lows, that's the type of action I'm looking for: Stocks refuse to go down and therefore make higher lows while the averages make lower lows.

Now look at what happened to Nike. By late March/early April, the stock had stalled at resistance. Was I bearish? No. It had a great run and was entitled to have a rest at resistance. But since then, it has done nothing. In that same time frame, the S&P has gone from 875 to 950. When Nike was given the chance to make a new high in Tuesday's rally, it was up big -- two bucks -- but how did it make the chart any different? I'd love nothing more than to see Nike make this a consolidation before moving higher, but shouldn't I be asking myself what's wrong, as it hasn't participated in this recent two-month up leg?

Amgen

I've owned Amgen ( AMGN) for a long time, and its chart is very different from Nike's. Look at that uptrend. As we all know, biotech has been one of the hottest groups in this rally, and Amgen was also well off its lows back in February and March. It didn't stop at the end of March, but rather waited another month and stalled out in late April.

This is not a bearish chart. But this stock is up a lot already, and for one month, it has gone nowhere. In that same month, the Nasdaq has gone from 1450 to 1550. That is a bit worrisome, but more troubling to me is that in mid-April, days before making that high, it gapped higher. Gaps are supposed to be bullish. Gaps that clear previous highs and resistance levels are supposed to clean out the sellers and cause a whoosh higher. Here it gapped up and simply exhausted itself.

Altria

Altria's ( MO) chart is vastly different than the other two. I should begin by disclosing that I sold it Friday. For a long time, I had a downside target of $28 on Altria. And I don't have to tell you how scary it was if you owned this stock when it went down there. The news was awful -- not a bright spot in the picture. But I liked the market back in February and March, and I was looking for stocks to buy. When Altria gapped lower and didn't continue lower, I realized it was trying desperately to hold that $28 target level. (Stocks that gap lower and don't fall further have the same exhaustion situation as stocks that gap higher and don't rally much more.)

I can't tell you how many times I almost sold Altria at $33. It was sitting right at resistance and didn't want to go anywhere. I admit I got very lucky on this one: I was preparing for my trip to the U.S. and wasn't bothering to trade. Then, we had a car accident, which distracted me from selling. But look at that chart: Resistance in this area is quite substantial, the news is out, and the upside is limited at this point. But it is not a bearish chart. In fact, if it pulls back into the mid to upper $30s, it'll look better.

That's really the crux of the matter: A correction will make these charts look better. A correction will reduce some of the excess. A correction is bullish, not bearish. But if stocks keep doing what they've been doing -- making new highs by eighths and quarters or nickels and dimes -- I'm going to continue viewing this market as just OK and not necessarily buyable. And that's why I keep on harping about a much-needed correction.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer.

Helene Meisler, based in Shanghai, writes a daily technical analysis column. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At time of publication, she was long Nike and Amgen, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback and invites you to send it to Helene Meisler.

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