StockTwits 50, May 21

• Posted by Ivanhoff
• on May 19th, 2012

A third negative week in a row for the indexes and it feels like there is even more to come. Financials and basic materials were hit the hardest, but no sector was spared.

Corrections happen for a reason. There is always some fundamental basis behind them, but after a certain tipping point markets will often overreact due to fear and forced liquidation.

We are in an environment where the return of capital is more important than the return on capital. When institutional money is scared, it goes to the perceived safety of U.S. Treasuries. The long Bond ($TLT) advanced 4%, closing at an all-time high. Only two months ago, it was down more than 9% for the year and it looked broken. A lot has changed since then.

It is the summer of 2011 all over again. The difference this time is that gold is not considered a safe harbor and its far from its highs. Even the long-awaited Facebook IPO didn’t manage to inspire confidence as the hefty supply and worries of rising sovereign yields in Europe soured the mood and fueled investors’ fear.

For the week, the St50 index dropped 6.22%. The S & P 500 and the Nasdaq Composite lost 4.3% and 5.3% respectively. The selloff in momentum stocks accelerated and was widespread. So many of them went from an all-time high to testing their 200-day moving average in less than a month. Such is the nature of momentum stocks. They take the stairs up and an elevator down.

Medical related stocks such as $PCYC and $CYBX are among the few bright spots in the current market, but it is unwise to talk about relative strength in a market of rising correlation. Real market corrections eventually get to all momentum stocks without an exception.

Moments like these help to better understand the flawed nature of the “buy and hold forever” philosophy. I am not saying that it doesn’t work with some stocks, but you better have nerves of steel and a deep pocket if you are playing this game. We often hear stories about stocks that are up several thousand percent in 5 or 10 years and if you managed to hold on them, your life would have changed. Those stories always conveniently skip the fact that there were several 50% or even 70% deep corrections along the day. “Buy and hold” works, but only when the buying is done from a proper base and when the holding includes an exit strategy.

For more than a month, we have been talking about raising cash and staying on the sidelines to protect capital and confidence. It has been a slow drip lower that is finally starting to accelerate. From a purely technical perspective, stocks might be entering that last stage of a correction, where correlation will approach 1.00 and all stocks move together irregardless of their individual characteristics. Historically this type of environment has been a buying opportunity for long-term investors to nibble on great stocks that are down for the “wrong” reason.

It is true that extreme market readings could lead to a turning point. Everything is cyclical in the market – prices, moods, multiples – but the duration of those cycles varies and they often continue long enough to change the mind of even the most stubborn.

In 4 out of 5 times, the current oversold readings have led to a tradable bounce. The question is, what if this is one of these fifth times? What if things get much worse before they get better? It is totally possible and you should always be thinking about the potential implications and have an exit plan for each scenario. There is nothing wrong with staying on the sidelines and waiting for the markets to recover and new proper setups to show up. Investing could be as complicated and as frustrating as you want it to be. We are in full control before we hit that bid button.

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 (@ivanhoff)

St50 May 21 New May 21 Removed May 21

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.

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