Churn, Churn, Churn

We might not be as eloquent as Pete Seeger (who set the words of the Bible to music in Turn, Turn, Turn) but if “to everything there is a season” then Friday’s action could well foreshadow the end of our uptrend “season” or at least indicate that it needs a good rest.

Friday we published a piece urging investors to “turn down the noise,” our point being to tune out others’ opinions and simply key off what the market is telling you. Our admonition so quickly thereafter might seem a bit strange but the market is a never ending story and each day’s action holds the potential to change the tenor of the market. We believe Friday’s did.

In our last piece we noted Thursday’s bullish close after ugly opening action. We said that it opened the way for upside and we got that when Intel (INTC) released bullish news in the pre-market on Friday. But after a gap up open we saw steady selling for most of the rest of the day. The NASDAQ closed positive but barely so and in any event well off its highs. Worse, the action occurred on high volume, the highest of the week on both indices and above average on the NASDAQ. It’s unusual to see such big volume on a non-options expiration summer Friday.

This kind of high volume trading where the indices end near where they started is called churning and it’s a sign of distribution. Clearly on Friday smart money was selling to latecomers who were excited by Intel’s news. What this action tells us is that the news had been widely discounted by the market during the course of the more than five month uptrend.

In fact good news all week last week succeeded in moving the market little and the weekly charts of both the NASDAQ and S&P 500 both reflect little change from the week before on elevated volume, so we have distribution apparent on the weeklies as well.

A correction does not have to happen. But given the mounting distribution on the indices, their inability to hold gains on myriad good news, and the rampant bullishness increasingly on display on CNBC and as reflected in the Investors’ Intelligence survey, which now shows 51% of investment advisors bullish as opposed to less than 30% at the market bottom in March, we believe it is time to take a defensive posture with your actively traded portfolio.

For starters we would be reluctant to initiate new positions in equities.

If you have stocks that, after the seven weeks since the uptrend resumed, have at last achieved a 15 – 20% gain from their most recent break out points, we strongly urge taking profits. Most stocks become increasingly subject to correction after they achieve a 20% gain over a course of many weeks.

Apple (AAPL) is an excellent example of a stock in which to take a profit. The stock’s last buy point was $144.66. On Friday, seven weeks after its break out, it hit an intraday high of $172.49 for a gain of better than 19%. Given that the stock broke into fresh high ground but surrendered all its gains into the close on volume that was higher than the previous day, we’d nail down a profit in the stock.

There are a number of stocks we recommended on our companion blog that have eight week holds on them because they swiftly achieved a 20% gain, often a sign of higher prices ahead. This coming week will be the eighth. Some are holding up well, others are in fresh bases. Whatever the case, if they no longer have a bullish posture we would consider a graceful exit this week.

Should a correction occur we have no idea how severe it will be. But being out of harms way allows us to unemotionally consider our options secure with our recent gains.