By all means, we are still in a bull market, which from a technical perspective is “innocent until proven guilty.”
However, I do see some warning signs that might foreshadow potential weakness ahead:
1) There is a smaller number of good risk/reward setups near 52-week highs; many stocks are extended.
2) Defensive sectors are starting to outperform.
Keep in mind that corrections in bull markets often take the form of sector rotation, where different sectors take the lead every 2-3 weeks. Market averages could just consolidate through time (as it has been the case so far) or have a slight pullback, while capital moves from one sector to another. It is a low-correlation “market of stocks” environment, which provides good opportunities on the long and the short side.
Financials, Healthcare, and consumer discretionary have led so far. Maybe tech and energy are next to step up?
For the week, the St50 momentum index gained 1.86%, outperforming all major benchmarks – always a good sign of risk appetite.
When a company reports much better than expected earnings, the market is usually quick to discount the new information and capital flows into other stocks from the same industry. This has certainly been the case with agricultural stocks – chemicals and irrigation systems. The top two performers on the St50 list this week – $RNF and $LNN – are from that group.
$ARMH keeps making new highs. It is the ultimate play in a secular trend – it designs (doesn’t manufacture) chips for smart phones and tablets. In 2011 and 2012, it spent 20 months going nowhere, consolidating sideways. Ever since it broke out last October, it hasn’t looked back. It appeared on the St50 list at exactly the right time – after it broke out, 11 weeks and 33% ago. At this point, it is a little extended from a risk/reward point of view.
3D printing stocks $DDD and $SSYS are still the talk of the town and it seems they are entering a new stage of public awareness. The media has started to extensively cover the industry. Wall Street is not sleeping either. It is a sophisticated marketing and distribution machine that pays attention to what people want. There is another 3D printing company going public soon – $XONE. From a technical point of view, another IPO is an increase in supply, but the 3D industry as a whole is still too tiny for that to matter.
Even if 3D printing stocks turn out to be nothing more than a good story, it is never a good idea to short a concept stock because it is up too much. Remember 2006-2007-early 2008, when oil prices were skyrocketing? Clean energy stocks were the hottest story stocks. There were like 10 new solar company IPOs every quarter. Many of them tripled and quadrupled before they crashed. With that in mind, both $DDD and $SSYS could use some form of consolidation (through price or time) at this point.
$LNKD managed to recover of its hangover from earlier this year and cleared recent resistance. All-time highs are not too far from here.
Over 80 companies are scheduled to report next week, providing a glimpse into the state of their business. It is a time when individual catalysts trump macro worries and become a major driving force of price and sentiment.
You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.
Have A Great Weekend!