StockTwits 50, April 30
- Posted by Ivanhoff
- on April 28th, 2012
One of the craziest and most volatile weeks for 2012 so far is behind us. The extreme pessimism and worry that the beginning of the week brought was quickly swapped for optimism and a good mood by Friday. There were some wild moves and comebacks, the most notable coming from semiconductors ($SMH) which returned more than 5% from the depths of the abyss. The second part of the week brought a relatively high correlation rebound, led by cyclically sensitive sectors. Consumer discretionary outperformed staples, while small caps outperformed large caps.
There is little doubt that one of the main reasons behind the market bounce last week was earnings. Coming into the quarter, analysts expected 0.8% earnings growth. We are almost at the half-way mark and the results are much better than expected: 5.3%.
Earnings have the potential to start a new trend, accelerate a current one or extinguish it because most of the time they provide a new piece of information that is not fully discounted by the market. Unless expectations change, prices don’t change.
For the week, the St50 momentum index gained 1.2%. The S & P 500 appreciated 1.8%, the Nasdaq Composite rose 2.3%.
The beginning of the week caused quite a bit of damage to the list. The worst performers came from companies that missed earnings estimates or guided below a consensus: $HSTM, $TPCG, $BIDU, and $CHKP. When a momentum stock is priced for perfection, even the slightest step away from the expected path could cause a massive exit.
Price action is among the main catalysts that matters and changes expectations. It might sound weird and irrational, but in a short-term perspective (we are talking hours, days, a couple weeks), price change begets more price change. These are the rules of the game if you want to play it. Short-term price action has enormous impact on investors’ sentiment and expectations creating a form of self-fulling prophecy. Where there is a recent evidence of buyers, more buyers show up. Where there are sellers, more sellers show up. You could always choose to do so from a longer-term perspective where fundamentals matter more.
In a real bull market, almost all news is good news and disappointments are considered a temporary setback. We are currently not in either a bull or a bear market. It is a range-bound, sober market, which rewards the winners and punishes the losers – let’s call it a market of stocks with increasing correlation due to the macro issues that plague the world.
Focus on stocks that broke out to major new highs on strong earnings and wait to consolidate their move and offer favorable risk to reward setups. These are the types of stocks that are most likely accumulated by institutions. When institutions buy, they do so for weeks – if not months – providing support along the way. It is the line of least resistance.
Ignore stocks that are in a downtrend and have underperformed year-to-date. In a market of stocks, they are there for a good reason. Stock-picking during market uptrends matter. In these markets, one has to remain open-minded and flexible. Change could be just around the corner and thinking about risk first will pay off in the long-term.
It is still a very tricky market environment, but a “market of stocks” nonetheless – essentially, a range-bound market where individual catalysts prevail and decide the destiny of stocks for the most part. It is likely to see pockets of consecutive red days, followed by pockets of consecutive green days, continuing long enough to confuse everyone. Even as the macro picture deteriorates, investors don’t care yet. It usually doesn’t matter until it does and what you do depends on your time frame of operation.
You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.
Have A Great Weekend!
~ Ivan Hoff (@ivanhoff)
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.blog comments powered by Disqus