You know, in terms of raw numbers, Wednesday's dip doesn't look terribly troubling. In the right context and perspective though, there's actually quite a bit to be worried about in the shadow of today's action for the market. We'll take the usual near-term look at stocks, but we're going to do that last in today's newsletter. The first thing we want to get to is a continuation of the topic we put on the table in yesterday's edition. Drilling Deeper Into the Small Cap Segment Thanks for all the kind words about yesterday's newsletter. We know hosting that kind of discussion can feel pretty heavy, but getting a better grip on the overall market is always time well spent. As we mentioned on Tuesday though, the valuations and earnings growth figures are only half of the battle. To complete the idea we really have to take a step back and look at the bigger picture (literally) for each small cap sector. Like we said, a bad chart can undo a good fundamental situation, and a good chart can overcome weak fundamentals. With that in mind, let's run through some of the S&P 600 sector charts we didn't have time to work through yesterday. We won't have time or room to get all of them in [not that we'd want to use all of today's time to do so anyway], but we can get three of them in. In no particular order... S&P 600 Telecom First and foremost, the per-share earnings spike (red, middle) for Q2 is going to look like an errant data point. But, it's not errant. It is anomalous though. Just take it with a grain of salt because it's not the norm. Of course, whether last quarter's spike in earnings is meaningful or errant is irrelevant. I didn't like the group before, and I don't like it now. The only way I'd be interested in any pick from this group is if the S&P 600 Telecom Index punches through a long-established resistance level. Move along - nothing to see here. S&P 600 Utilities When we looked at the fundamental data on Tuesday, I wasn't thrilled with the utility sliver of the small cap market. The chart of the S&P 600 Utilities Index hasn't changed my mind. That's not to say it's a poor performer. Heck, it's been oddly bullish since 2009. The pace of the advance has been pretty weak though, and the valuations have quietly walked higher during that time, making the group less than-buy-worthy now. S&P 600 Technology The only one of the three sectors in focus today that we liked for fundamental reasons yesterday was the technology sector. The more I look at this chart, however, the more leery I am of getting into it. There's nothing awful about it. The group just looks like it's overextended and ripe for a dip. Maybe it's worth it. I do believe the recent increase in the ascent angle of per-share earnings is basically plausible. Just bear in mind most of the bigger earnings figures are projected rather than the past; the blue arrow marks the point between trailing and future (estimated) income. If the group really does put up record-breaking earnings for Q3, then I'll be fully convinced. Hopefully the index and all of its stocks will be reeled in a little in the meantime. Nevertheless, I am willing to go long-term shopping - selectively - for small cap technology stocks based on our analysis thus far. I'll let you know what it is when we find one. Does all of this make sense? We know it's a little bit different than the ideas and approaches you've seen before. Most stock-picking is done from the bottom up, meaning you find a stock you like, then you check its prospects, then you check its peers' prospects, and then you take the market's temperature. Our top-down approach looks at the market first, and then drills down into the sector and/or market cap, and then drills down to find individual stocks from the best sectors. Both approaches are theoretically sound, but it seems like this top-down approach tends to produce better results for long-termers. For short-term traders, it doesn't matter much. We'll get around to looking at the other S&P 600 sectors and their income trends as soon as we get a chance. Portfolio Checkup All in all it wasn't a bad day for our current open positions. JC Penney (JCP) and Verizon (VZ) were up, while AES Corp. (AES) was down. Actually, I suppose we could only categorize today's action as mediocre for us, overall. AES took a sizable hit, losing more than 2.0%. I'm not worried about it though, nor do I expect it to go anywhere. The only news of any real consequence for the portfolio today was from Verizon. The company was forced to fork over $7.4 million to the FCC for failing to provide customers with their privacy rights. Even then, it's not a big deal. You may have also seen Morgan Stanley downgraded the entire telecom sector to "cautious" today, whatever that means. Morgan Stanley said stiff competition and valuation concerns were the reason for the downgrade. I understand the premise of Stanley's argument. I'm just not sure it matters... at least not to us. Ours is only a short-term call/pick, so all we care about is momentum. Anyway, this is where the portfolio stands as of today. No new stops for any of the three open positions. More Red Flags Waving In the interest of fairness, I'm borrowing a few of the key points John Monroe made in the Elite Opportunity newsletter today to use as fodder for this particular newsletter. He's pretty much been hitting the nail on the head for the past several weeks, and I'd be crazy to jump ship now. Above all else, kudos to John for seeing today's battle coming. For weeks he's pegged the NASDAQ 100 Index's [not an index we look at much] ceiling at 4105, and said the S&P 500's equivalent target was 2013. The NASDAQ 100 bumped into that resistance on Wednesday, and the S&P 500 peaked around 2010. That's about as close to perfection as it gets. Now, neither John nor I are saying a pullback is a foregone conclusion from here. But, he was spot-on when he told his readers this was going to be a contentious spot, and something of a make-or-break situation for stocks. There was something philosophical he added in today's edition of the Elite Opportunity newsletter, however. John wrote: "Now that the S&P 500 is only a mere 5 points away from our short-term target of 2,013, what we'll be looking for on an extremely short-term basis is divergence between the NASDAQ 100 and the Russell 2000, as it relates to the S&P 500. Why? Because the NASDAQ 100 has led all along, while the Russell 2000 could be the first leading indicator of at least a short-term trend reversal in equities. In other words, if for whatever reason the NASDAQ 100 and Russell 2000 can't manage any further gains while the S&P does, it could be an early sign of a developing potential short-term reversal in equities. It all remains to be seen but it's definitely something every short-term trader should be keeping an eye on." This touches on an idea we've discussed before - aggressive stocks lead the market's charge, higher as well as lower. If small caps and tech stocks start to falter even if the large caps and blue chips don't, it's an alarming hint traders aren't feeling bullish. A lot of major and even minor market tops drop such a hint before taking shape. Now, care to guess what happened today? The Russell 2000 took a pretty good hit, losing 0.6%. The NASDAQ Composite lost about the same. The Dow actually gained a little ground on Wednesday, and the S&P 500 closed a bit in the red. Maybe it's nothing, but it's probably something along the lines of a gravitation towards safety and away from risk. That being said, today's biggest red flag isn't necessarily the bigger losses suffered by the Russell 2000 and the NASDAQ, but the shape of today's bars for both. It was the biggest loss in weeks for both indices, and worse than that, they were outside-day reversals. This just means the open was above yesterday's high, the close was below yesterday's low, and the high-to-low intraday action was in the opposite direction as Tuesday's low-to-high action. It suggests a rapid and major change of heart. No need to show it for the Russell 2000 Index, but since we want to look at the NASDAQ Composite anyway, you can see the outside reversal quite clearly on the composite's chart. The other noteworthy detail for the NASDAQ's chart today is how the VXN just logged its fourth higher close. It IS putting pressure on its combined 20-day and 50-day moving average lines, and though it's not hurdled either level yet, it's on the verge. Against the backdrop of a major outside day reversal for the NASDAQ, it's a reason to be concerned. To the extent it matters, here's the S&P 500. It's still treading water right around 2000, and while the VIX didn't move firmly higher today, it's also within reach of a move above its own big ceiling. I've got some thoughts on where this is all going, but there's no need to put them on the table yet. Much of my outlook depends on what stocks do next. Be sure to check in tomorrow. Just as a teaser though, this all looks a bit troubling. John Monroe over at the Elite Opportunity has some strong feelings about how this is all shaping up as well. I can't give you the action-oriented aspect of his comments since they're reserved for EO subscribers. But, you can clearly see he's had his finger on the pulse of what's taking shape for the broad market, playing the ebbs and flows with surgical precision. If you want to put your short-term trading into high-gear, he's the proverbial horse you want to hitch your wagon to. You can still get the free trial to the service too. Here's how, or cut and paste this link: https://www.smallcapnetwork.com/?vmpd_ckstr[click_track]=Newsletter&vmpd_ckstr_redirect=/pages/SCNEO/v1/