StockTwits 50, May 7
- Posted by Ivanhoff
- on May 5th, 2012
We are still in a trendless, range-bound market environment, where gains are short-lived and many typical setups have high failure rates. Last week, I mentioned that the market is likely to have a series of several up days that will continue long enough to confuse everyone. Even I was thinking at some point on Wednesday that I was wrong and the market was heading to new highs. Now we have two consecutive red days and the mood is starting to get sour. A couple more days and the perma-bears will have to dust off their suits, because they will start getting calls for TV appearances.
It continues to be a “market of stocks” environment, but correlation has been gradually rising. The long bond ($TLT) is confidently advancing above its major moving averages. There is no better growing indication of defensiveness.
The market mood is getting sour slowly and mood tends to feed on itself. Crude oil ($CL_F) was decapitated and in a few short days it lost all its year-to-date gains and then some more. Maybe this is one of the reasons why the consumer discretionary sector ($XLY) has such high relative strength. Don’t be fooled. A real correction will hit them all, sooner or later.
For the week, the St50 Momentum index lost 2.6%. The S & P 500 fell 2.44% and the Nasdaq Composite shed 3.7%.
The Best St50 performers were stocks with immediate earnings catalysts: $LQDT, $MGAM, $DXPE, $FIRE, $WFM. They all reported much better than expected numbers and outlined a rosy rest of the year for their businesses.
$DXPE actually started to break out before its earnings report. This is typical for momentum stocks, but actually has been rare in the current market environment, which only reflects its cautious nature. The majority of the breakouts this earnings season have happened after the release of a report that provided positive information that had not yet been discounted.
I don’t know if the approaching Olympics is a viable reason, but over the week all three of the St50 athletic stocks cleared new all-time highs on high volume – $NKE, $UA, $LULU. This is a development worth keeping a close eye on.
Visa ($V) also broke out to an all-time high after reporting much better than expected earnings and sales growth, but it did not stay long in that territory. A brief notice that it is being investigated by the DOJ spooked the market and its shares dropped below its 50dma on heavy volume. The company has been through this process multiple times in the past and it has always emerged strong. But in the immediate time perspective, one has to respect price action and realize that no stock is insured against fear.
Price is not the only reason to enter a stock, but price is the only reason to exit it. No trend lasts forever and when it cracks, you better have a plan to exit quickly, because liquidity might not be there just when you need it most. This is one of the reasons why big institutions need to sell when they can, not when they have to.
Many momentum stocks are priced for perfection. When the slightest cloud appears on the horizon, everyone heads for the exits at the same time and the ensuing stampede could wipe out three months of gains in a week – sometimes in a day. Business conditions change, people’s perceptions change. Sometimes for a valid reason, sometimes because of animal spirits. And when expectations change, prices change.
Case in point – Herbal Life ($HLF). The stock went from 6 to 72 in three years. Then a couple of questions during its conference call started a process that shaved 40% off its market cap in a week. It matters who asked the questions of course. Wall Street is a house of mirrors, where originality is scarce. You don’t have to be original to make money in the stock market, but when you have a good track record and you sound confident, everything you say will impact people’s perceptions. People like Warren Buffett and David Einhorn can move markets because their reasoning impacts people’s thinking. This is Wall Street. Many people manage career risk, not just money and to survive everyone is looking at what the guy next to him is doing.
Sometimes the market is an ingenious discounting mechanism that predicts future events better than anything. Other times, it is a short-sighted, scared creature that jumps all over the place without reason.
You have to be really nimble in this market environment and lower the expected target on positions. For most people, it would be wise to stay on the sidelines and protect capital for better days.
Protect your confidence.
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