Who said that trading during the summer period is boring? For the week, the equal weighted St50 momentum index appreciated 6.1%. 30 of the St50 stocks went up more than 5%. We experienced one of the most intensive and broad equity melt-ups during which the S & P 500 went up 5.65% and the Nasdaq Composite gained 6.15%. Most stocks went up. The big losers were the U.S. Dollar index ($UUP) and LT Treasuries ($TLT), which lost 2% and 3.45% respectively. The best performers on the St50 list were: $MPEL, $QCOR, $CCIX, $GLBC, $PSMT, $RBN, $LULU.
Market uptrends have different duration – some extinguish in 3 weeks, others manage to keep the momentum for several months before the imminent and needed correction comes. The common denominator between the uptrends is their structure. History never repeats, but it often rhymes. Most uptrends follow a similar cycle of four stages as the duration of each stage varies.
Stage 1: Momentum stocks outperform while the general market averages are still declining. The leadership is thin. From one side this is good, because you can concentrate on very few stocks; from another – not so much as most breakouts don’t follow through or the gain is limited. Two weeks ago, some momentum leaders started to move into new high territory, but most breakouts failed. The St50 closed negative that week, slightly outperforming the averages. Then, on the following week, momentum stocks significantly outperformed the market averages for a first time in several weeks, indicating a potential return of risk appetite. We’ve said it here on numerous occasions – momentum stocks are the ultimate leading indicator.
Stage 2: All stocks go up and some laggards even outperform. Beta is the major factor here. All breakouts work. V-shaped moves are typical. The move is broad-based. Stocks in clear downtrends outperform as they reverse and squeeze the hell out of the shorts. Last week was a good representative of a typical stage two. Stocks like $RENN and $YOKU, which only 10 days ago investors could not get rid off fast enough significantly outperformed.
Stage 3: Momentum leaders outperform again as individual catalysts trump the general market impact. The market goes up on the back of smaller number of industries.
Stage 4: Momentum leaders roll over one by one as institutions distribute and take advantage of the liquidity to lock in profits. Small cap, low priced stocks outperform as 40-50% moves in a week are not uncommon.
The lack of bad news is good news. It feels like that for the foreseeable future, macro catalysts will play a secondary role. The earnings season is knocking on the door and individual stock catalysts should prevail.
How quickly the sentiment could change. We went from pessimism, to disbelief to fear of missing out in less than 2 weeks. In days like these, we better understand the concept that we don’t have to be in the market all the time as there will always be periods when we can get aggressive and compensate for any temporary inactivity.
We have said before that some of the biggest daily and weekly market moves happen during downtrends. We are not in a downtrend anymore. The major market averages are within a striking distance from their 52wk high and the number of stocks trading at new all-time high continues to expand.
By all measures, the equity markets look overextended and a correction trough time or price is widely expected. The most surprising move that the market can offer here is to go up another 2-3% next week. Let’s see who will prevail after the long weekend – the guys who positioned themselves short in order to play an eventual mean reversion or the guys who are afraid of missing out and are willing to chase here.
Be careful. Now it is not the time to chase overextended names. If this trend has more room to go, there will be numerous new setups that will show up. The beautiful thing about bull markets is that they provide more opportunities that you could possibly take.
You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.
Have a Great Weekend!
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