StockTwits 50, February 6

Posted by Ivanhoff
on February 4th, 2012

Equities have had an incredible start to the year so far. The Nasdaq Composite is at levels not seen since the dot.com era and the rally is going by the textbook: The right sectors continue to lead (financials, building materials, industrials, and technology). Defensive sectors like Utilities and Healthcare underperform as capital is chasing higher yield. Gold and Treasuries are losing ground as the market perception of improving economic growth prospects diminishes the need for further quantitative easing. Small cap ($IWM +4.2%) and emerging markets ($EEM +3.6%) stocks continue to outshine, confirming the improving risk appetite in the market.

Further, nobody talks about Europe anymore. The all-time high list is rich and expanding. Dips are shallow and short-lived. Poor earnings reports receive favorable market acceptance. New car sales are growing. People’s savings are improving. And the last sane bear probably gave up on Friday when the employment number came in significantly above expectations.

We are certainly in the acceptance stage of the rally where the opportunities and threats are overwhelmingly numerous. What could possible go wrong here? Deeper consolidation through price is natural, but not guaranteed at this point of time. If it happens, it is very likely to be welcomed as a buying opportunity by institutions that slept through the last two months of relentless rally.

Only five months ago, “the world was coming to an end” and it felt that the market would never go up. Today, it feels like it will never go down again. At some point it will. Guessing when is a dangerous approach from both a strategic and tactical perspective. Yes, some people are skilled enough to make money shorting stocks during bull markets, but there is very high opportunity cost to picking up nickels in front of steamrollers.

For the week, the St50 Momentum Index appreciated by 3.53% outperforming $SPY (+2.1%) and $QQQ (+2.7%). Capital flows are finally re-orienting from the beaten down in 2011 names that squeezed higher in January to fast-growing momentum names.

The best St50 performers came from various sectors: $TRAK (software) gained more than 10% after breaking out to new 3-year high from a 3-month flat base. $HALO (biotech) advanced to new all-time highs after a brief rest above its rising 20-day MA. Other notable breakouts to new all-time highs in this weeks’ top St50 performers include $SWI (software), $RGR (guns), $AKRX (generic drugs), and $MELI (emerging markets’ Internet retailer).

At this point of the rally, it would not be surprising to see some of the high-ticket momentum stocks like $AAPL and $ISRG outperform as institutions are looking for ways to gain quick exposure to equities.

Chasing extended names is never wise from a risk-to-reward perspective. At this point, the most vulnerable to time or price consolidation amongst the St50 stocks are: $COH, $ELGX, $NANO, $HALO, and $COR among others. Indeed, many of the St50 stocks seem extended and in need of consolidation, either through time or price. The same could have been said last week and the week before, and yet market averages continued to climb “a wall of worry,” as different industries picked up the leading role along the way.

It makes sense to rotate money into fresh breakouts. Some of the St50 stocks that are still building a base in expectation of a potential breakout include: $STAA, $UA, $ULTI, $FTI and $JAZZ among others.

The beauty of low correlation markets is that when the inevitable correction comes, there are still stocks that hold well and make new multi-year highs. Focus on what is working and on risk management. Nothing else elevates confidence and optimism as a few weeks of price appreciation. But on the flip side, nothing else brings complacency as the result of several consecutive profitable trades.

Stay nimble.

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

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

Have A Great Weekend!

Ivan Hoff

St50 Feb 6 New Feb 6 Removed Feb 6

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.