Last week, we saw a not-so-subtle change of character in the markets. The indexes broke out to new all-time highs on Wednesday, only to reverse lower ugly on heavy volume. Momentum stocks underperformed, the St50 index fell 1.4%, and the leading market in the world – Japan – took it on the chin. It took a couple days to erase a months’ worth of gains. One day might not make a trend, but one day such as Wednesday is indicative that we have likely entered a very different market environment which calls for tactical adjustment.
All major indexes are still above their rising 50dmas. Technically, the trend is still up. But it would be foolish not to pay attention to the sudden increase in short-term volatility. This is how many trends end. And by “end”, I don’t mean falling apart, but just entering a potential distribution phase where many stocks are transferred from strong hands to weak hands, volatility is elevated, there are a lot of fake breakouts and breakdowns, and short-term mean-reversion has higher probability of success.
Unusual price action reveals a lot about the current inventives and state of mind of all market participants. What we learned from the price action after the reversal on Wednesday:
- people are still keeping one leg out the door, uncomfortably long and under-invested. Most rather see and buy at lower prices, which means that the real surprise is still to the upside;
- dips to major moving averages (20, 50, etc.) are welcomed as buying opportunities. This time, there was no hesitation, fear or second-guessing. People stepped up and bought. The question is how long are they going to hold?
- markets are already discounting the gradual tapering of QE. The yield is rallying. Bonds are under pressure. Utilities and REITS were among the worst performers last week. Financial markets are forward looking. Prices change when expectations change.
In a rising interest rate environment, financial stocks are typically among the first beneficiaries. It is worth paying particular attention to this sector.
From a technical perspective, the healthcare sector looks better positioned. $JAZZ, $ALKS, $VRX and many others from the group held remarkably well during the market pullback and are trading near multi-year highs.
Only two months ago, the mere mentioning of solar stocks in a positive light was a sure way to receive a ton of hate-mail and ridicule. All of a sudden, in the past week everyone loved solar and the small cap stocks from the industry just went parabolic. I will repeat what I have said several times already – solar is to 2013 what homebuilders were to 2012 – the industry that will outperform all others while surprising the majority of skeptics.
There are still plenty of stocks that are holding well and offer good risk/reward opportunities. Keep in mind that in a highly-volatile range-bound environment there will be a lot more failed breakouts and breakdowns. Some of the better looking setups for next week include: $CHUY $GNC $MX $IMMR $ARMH …
You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.
Have A Great Weekend!
St50 Technical Spotlight – Yelp
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St50 Technical Spotlight – Cabot Oil & Gas Corp.
Posted by BenCBanks on May 19th, 2013 at 10:50 am, Comments: 0
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St50 Technical Spotlight – Electronics for Imaging Inc.
Posted by BenCBanks on May 15th, 2013 at 8:55 am, Comments: 0
Electronics For Imaging Incorporated ($EFII) has been trending higher for multiple years in a stair stepping fashion. Recently it has pulled back to a rising [...]
St50 Technical Spotlight – GNC Holdings
Posted by BenCBanks on May 12th, 2013 at 10:50 am, Comments: 0
GNC Holdings ($GNC) has been stair stepping higher all year providing many successful breakout entries. GNC Holdings has now set up again for a breakout to all [...]
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St50 Technical Spotlight – Monsanto Corporation
Posted by BenCBanks on May 8th, 2013 at 8:55 am, Comments: 0
Monsanto Corporation ($MON) has without a doubt been a laggard this year but as this market continues to grind higher there will be rotation in [...]
St50 Technical Spotlight – Gap Incorporated
Posted by BenCBanks on May 5th, 2013 at 10:50 am, Comments: 0
Gap Incorporated ($GPS) broke out to new highs on Friday along with the major indexes. What makes Gap different from the indexes is the relative [...]
StockTwits 50, May 6
Posted by Ivanhoff on May 4th, 2013 at 10:52 am, Comments: 0
You have heard the Wall Street aphorism “Sell in May and go away”. It is still too early, but so far the only things that [...]