Happy mean-reversion Turkey week. Most stocks rallied from deeply oversold conditions and are now back to levels where strictly technically speaking, buyers are likely to lighten up and sellers are likely to show up and press again.
The market week was shortened due to the holiday, but rich with action. Two developments deserve special highlight.
1) The U.S. dollar got kicked in the head again, sparking a rally in gold and silver. While it is true that most of the breakouts in precious metals and miners have reversed quickly this year, you can’t help but notice the price action on a longer-term weekly chart. Both, $GLD and $SLV rallied hard to almost new 52-week highs near the end of the summer, only to retrace with the general market in October. They found support near their rising 200dmas, where they bounced on pretty decent volume – price action that looks pretty bullish to me.
2) While momentum leaders like $AAPL took quite a beating over the past 2-3 months, eternal dogs that are regularly ridiculed by market participants like $GME, $NOK, $RIMM and $OSTK went into a major short-squeeze spiral, appreciating more than 100% from their 2012 lows reached in August. Last week, I mentioned that during “risk-off” periods for the market, many managers cover their long-term high conviction shorts as redemptions hits even those that are positioned right and making money. And who knows, maybe expectations for higher taxes in 2013 are the main reason behind it.
The market environment could generally be divided to low-correlation and high correlation. Momentum breakouts typically work better in a low-correlation aka “market of stocks” environment, where individual catalysts trump macro concerns.
Correlation is highest during the last stage of a downtrend and the initial stages of market recovery. It is a period when almost all stocks move together.
There is a lot of chaotic price action during high-correlation market environments – most daily charts look like a mess, producing a lot of contradictory signals. There are two ways to cope with it. You either have to zoom out and look for weekly charts to find good setups for when the market recovers. Or, you might go in the other direction and zoom in, looking to take advantage of shorter-term moves.
You have two choices during high-correlation environments – you could either go on vacation and sit it out in order to protect your capital and confidence. Or you could adopt a new strategy for the new market environment. No strategy works all the time and in high-correlation markets, mean-reversion setups have higher probability of success.
For the week, the St50 Momentum index appreciated by 3.68%. Only three stocks finished in red ($FMCN, $INTU and $INXN), which reflect the high correlation market environment we are currently in. Ten gained more than 5%.
3-D Printing stocks, $DDD and $SSYS, were among the few that managed to weather the correction storm and not surprisingly they were among the best performers when the general market rallied last week.
The organic food retail chain $TFM finished with an all-time closing high. It managed to recover to the gap up and sell off from late August and slowly build a new base.
The data from the homebuilding industry continues to positively surprise and give boost to all housing related stocks. Homebuilders, home-improvement stores, property insurance stocks, regional banks are among the best performers in 2012. $LEN from the St50 list is back near multi-year highs, but technically it seems tired as there have been some clear signs of distribution over the past 10 weeks.
You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.
Have A Great Weekend!