MARKET CHECK

It’s another green day in the markets, as we’ve essentially round tripped since Monday’s big selloff.  There isn’t much news out there today to spark a big move, and some digestion is in order after the wild swings we saw earlier this week.  At present levels, the Russell 2000 is leading markets higher, up 0.6% on the day, with the S&P and Nasdaq slightly lagging, each up about 0.5%.  Bonds are relatively flat on the day, down by about 0.1%, and metals are weak yet again, with gold and silver both off by about 1.5%.  Their recent inverse correlation with equities continues, as stocks have been moving higher recently amid a strong dollar.  Since the beginning of February, the U.S. Dollar is on a tear, and it’s pulling equities up with it.  This is very different than what we saw during most of the QE environment, as a weak dollar lead to “risk on” environments where metals and stocks moved tandem.  This correlation shift could have big implications for markets going forward, but it’s still early in the process.

CHART OF THE DAY

CarMax, Inc (KMX) – The auto retail company has been very strong as of late, with the equity up about 45% since bottoming last June.  Despite its strength, sentiment has yet to catch up to the strong price trend.  Currently, there are 1.3 puts for every call in the front three months’ open interest.  This reading ranks in the 96th percentile of all ratios over the past 52 weeks, and shows extreme bearishness.

Technically, I like the pullback here to the 50-day moving average, a trendline that caught the last bounce in KMX in December, and could once again act as support.  KMX failed multiple times at the 40 level, so going forward, this is an obvious hurdle to breach.  An entry here makes sense, with a stop on a close below the 38 level.  I’d initially target a move back to 40, but am looking for a break to new all-time highs in the near future.  Should KMX reach 40, take some partial profits and trail stops.

courtesy of stockcharts.com

WHAT I’M EXPECTING

A fairly dull end to the week.  We’ve had some wild swings over the past four days, and the market needs to digest these moves.  We remain pressed up against the multi-year highs we made last week, and everyone’s eyes are likely glued on them.  I remain in the bear camp until those highs can be retaken.  That said, at this point the momentum resides with the bulls, and it’s likely to happen next week.  It’s just difficult to be long the market here and now and have reward/risk in your favor.  As a trader, you have to worry more about taking good setups than being “right” on your stances.  I became overly bearish last week, and for that reason missed the buying opportunity near 1480 on the S&P.  Chasing it here, though, would be a mistake.