StockTwits 50, October 15
- Posted by Ivanhoff
- on October 13th, 2012
The major market indexes $QQQ and $SPY closed below their 50dma for the first time since July. Their long-term trend is still intact, but one has to be blind not to notice the piling up of distribution days over the past month. What is the essence of distribution? It is basically a transfer of ownership from strong hands to weak hands and on the charts is recognized as high volume, big range one-day declines. By “strong hands” I refer to people that bought breakouts from proper bases. As long as they are in the game, corrections are likely to be shallow, because they operate from a position of profit. By weak hands, I refer to people that missed the initial breakouts from proper bases and now are anxious to jump on any pullback. By buying stocks in a correction mode, they put themselves in a vulnerable position from a psychological perspective and even the slightest further weakness is likely to scare them and therefore exacerbate the downtrend.
How serious is the current market correction? Judge for yourself. Here are the six symptoms of deeper market corrections:
1) Momentum stocks lead to the downside. Lists like St50 and IBD50 underperform the market averages.
2) There are less and less good long setups to be found, which is usually a normal result of a previous rally that sent a lot of stocks to the stratosphere
3) Breakouts are scarce and don’t find follow-through
4) There is poor reaction to good news like positive earnings surprises and upgrades
5) There are huge 25-40% one-day drops in some liquid stocks
6) Longer-term moving averages like 100dma and 200dma come into play. In healthy market environments, the real momentum leaders rarely drop below their 10, 20 and 50dma. Anything below that is a sign of worsening risk appetite.
Last week, we pointed out the underperformance in momentum stocks. As it is often the case, they turned out to be a good leading indicator for the overall market. During shallow market corrections or as I like to call them – sector rotations – most market leaders remain unscathed. During real pullbacks, they get hit first, which is a good sign of diminishing risk appetite. For the week, the St50 momentum index declined 2.82% – a little better than $QQQ, but behind the $SPY.
Two groups of stocks shined last week – biotechs, which are usually not correlated with the general market and often live in their own world; and coal stocks, which have made their N-th attempt to rally from the bottom. The recent rise in natural gas prices and rumors of impending bigger stimulus in China are the catalysts behind the recent move in coal. When all is said and done, they remain in longer-term downtrends and they have a lot more work to do before they entice any momentum investor to put money there. Of course, when it comes to momentum, everything depends on your time frame of operation.
Corrections are a normal stage of the market cycle. The silver lining is that they allow extended stocks to form new bases and make the spotting of potential future leaders easier. Pay attention to relative strength. Which stocks are making new 52-week highs or are holding near 52-week highs while the general market is falling? The correction in May, earlier this year, highlighted for us stocks like $PCYC $ELLI $DDD $MLNX, which outperformed substantially after the market started to recover.
Earnings season is here. The good news is that both analysts’ and the market’s expectations are not too high, which is usually a predisposition for real market surprises. Genuine surprises start new trends or accelerate existing ones. As with any other news, market reaction is more important than the news itself. $JPM and $WFC beat the estimates on Friday, but sold off. It is true that financials have rallied in expectations of good earnings, but nevertheless it is never a positive sign when stocks decline on good news.
I am not going to finish the weekly review with a highlight of good setups this time. The market is in a correction mode, meaning that the few proper setups we have left have a low probability of following through. As always, any major developments on the list will be mentioned on my StockTwits stream.
You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.
Have A Great Weekend!
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