StockTwits 50, April 16

Posted by Ivanhoff
on April 16th, 2011

“The dream of the future is what excites people, not the reality” – Nicolas Darvas

For the first time since August 2010, the major averages had five consecutive down days. For the week, the equal weighted St50 index went down -0.78%, caused mainly by weakness in recent momentum leaders in the face of energy and precious metal stocks. The S & P 500 lost 0.64%. The Nasdaq Composite declined by 57 basis points. Despite all the negative developments, there are still distinct pockets of strength. After a weak start of the year, emerging markets and retail stocks are catching up and have outperformed over the past month.

Capital continues to flow into biotech stocks, which we specifically highlighted here two weeks ago. Many of them had powerful breakouts to new 52-week highs at the beginning of April and then consolidated through time as the general market entered in correction mode. Few people know what is the underlying reason behind that sector move or what products any of those companies are actually making, but we don’t really have to know. In the words of Nicolas Darvas:

It is the anticipation of growth rather than the growth itself that leads to great profits in growth stocks. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality.

Chinese and Indian Internet stocks have been on fire lately. The investing theme of ‘social’ has gradually become as hot as “.com” used to be in 1999. There is a huge demand for ‘social network’ related companies and eventually the printing machines of Wall Street are going to provide the needed supply. There is no question about it. There are already half a dozen social related companies in the IPO pipeline. Until the demand is saturated, fortunes will made and lost.

The stock market is always different and it is never different. The popular investing topics change, but investors’ psychology doesn’t. Let’s take a closer look at $SINA. The Chinese Internet company had its IPO in April 2000, when anything ‘.com’ was super-hot. It went up from $18 to $60 in 2 months, before it was caught in the deflationary vortex of the tech bear market. Eventually, it went to a $1. Then in 2003, money was chasing emerging markets and $SINA was considered the perfect exposure to the potential growth of the Chinese Internet market. Truth to be told, the bottom line growth also played an important role. Sina’s EPS went from (-.03) in 2002 to (.75) in 2003, which catapulted the stock from $2 to $47 in less than a year. In 2010, $SINA came back on the radar as the majority holder of Weibo – the so called Chinese Twitter. The stock went from $40 in September 2010 to 124 today. You have to give respect to Sina’s management or investment bankers. For some reason they have found a way to ride three of the hottest investment themes of the past 12 years.

As long as you keep your eyes on stocks with high relative strength, that beats expectations, you are likely to own the leaders that have found a way to monetize the ensuing social and business trends. Historical studies reveal that stocks with high 6 month RS tend to significantly outperform during any market environment, including periods of high inflation. Six month momentum has the biggest weight in the St50 proprietary market cap weighted RS score, which itself has the highest weight in the overall St50 score.

Earnings season is here and the number of companies to report will accelerate in the coming weeks. Google missed by less than 1% and the reaction was telling. The market sent clear signal that it will be merciless to any earnings releases that fall below the expectations.

The ST50 is a powerful equity selection tool. Equity selection is a necessary, but insufficient condition for consistent market success. Disciplined risk management is needed for the latter. Patiently wait for the highest probability setups in the strongest stocks to develop before you commit any capital.

See the daily charts of the St50 stocks on finviz; also weekly charts. See the About section to gain my perspective how to use the St50.

You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.

Ivan Hoff

St50 April 16 Removed Apr16

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.