Tuesday, October 4, 2011

Generals In Danger ?

One of the market tells that one should keep an eye on is the behavior of "the generals". These are those stocks that lead to the upside and are very stubborn about joining any bear market collapses. The old wisdom is that a market decline isn't complete until the generals have been taken out and shot.

Well if you take a look at some of the popular generals now, you might say they are being blindfolded and given their last cigarette. Take, for example, Herbalife. This stock has shown astonishing resistance to all the market turmoil, and is still looking very strong. But there are bad problems developing:

The moving average pair of the 140/200 day ema (blue and red lines above) that I like to watch has been holding as support all the way, but now is being breached. I don't mind a brief puncture of these two moving averages, but when it is in the context of the negative RSI divergence and the negative A/D trends shown, it is a bad sign.

Another popular general has been Core Labs. They help oil and gas companies map out reservoirs for the more complicated recoveries that producers must deal with these days. They've been like the Apple of the energy industry - indispensable. The stock has beem immune to all the market dips - until now:

Here we see the same negative RSI divergence over the last few months and the tell tale negative A/D (accumulation/distribution) switch. This general has already taken a bullet.

Speaking of Apple, could even this general be in danger?

Uh oh - maybe so. The A/D is still looking good, but a negative RSI divergence is clearly happening. I tend to think of Apple not as a high flying tech stock, but a utility or a soap and cereal defensive stock. Their products are used by us all like we use soap, cereal, and electricity. But even the defensive recession generals aren't looking so good these days. Take for example Perrigo, the off brand maker of money saving goods that thrives in bad times. The stock has been off limits to the bears:

But we see the same RSI and A/D melt downs developing even with this one. The high flyers are meeting a similar fate. Green Mountain Coffee is unraveling, not to mention Netflix:

The state of the generals is not good. This is the exact same analysis that caused me to get defensive on the general market back in May when I posted Market Changing Stripes ?
Here is the chart of the S&P 500 I posted in that article:

This RSI and A/D pair accurately forecasted the market's decline thereafter.

We're likely to get a bounce soon from an oversold condition. The behavior of that bounce will be critical to determine if we get back to a choppy sideways market or go into a further decline. If the generals don't break out of their weakening pattern in the bounce, the forecast won't be very good.

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