What a turbulent week! If you went on vacation last weekend and you are just looking at the closing prices of the major indexes, you might come to the false conclusion that nothing happened. The truth is that under the surface, there were some wild moves and a lot of mixed signals for the immediate market direction.
From one side, we have an increase in short-term volatility – which typically tends to happen when a long-term trend losses its momentum. From the other side, consumer discretionary stocks outperformed all other major sectors by a mile – usually a positive sign. Also, momentum stocks fared extremely well as a group. While the S&P 500 and the Nasdaq Composite finished the week mostly flat, the St50 Momentum Index gained 1.09%.
Crude oil dropped 2.5%. Maybe this is why some of the best performing groups last week were refiners, airlines and air delivery stocks.
The biotech index ($IBB) reached new all-time highs. Not just new 52wk high, but a new all-time high and it is already 65% above its pre-financial crisis levels. What crazy times we live in. On the St50 list, $CELG also cleared new all-time highs after six weeks of sideways consolidation. $JAZZ reported another impressive quarter and it is hovering near multi-year highs.
3D printing stocks were spanked earlier in the week as 3D Systems earnings report was not as spectacular as expected. 3D printing stocks were priced for perfection in 2012. Now the market needs to see a confirmation of its expectations in terms of real earnings and sales growth so the trend could continue. Trends are sustained by catalysts and a good story is only one of them – it is not enough to sustain a really long-term significant trend. It might be good for 6 to 18 months, but at some point the market will want to see its hypothesis about the future confirmed by real results. Both, $DDD and $SSYS will need time to build new bases. $XONE is a recent IPO and it still needs to prove itself by breaking out to new highs. $PRLB is technically looking the most alluring. It managed to find some support near its rising 20dma and with a little wind in the back from the general market, it won’t be a surprise if it test its all-time highs in the next couple of months.
$CRM did it again and beat earnings estimates. Coming into 2013, Salesforce was all “experts” favorite short. They might turn out to be right, but guess what – two months into the new year, $CRM is at new all-time highs and has 10% of its float sold short – a recipe for a short-squeeze if you ask me.
$LNKD continued to climb as sell-side analysts declared their love, which only confirms Gerald Loeb’s observation that “You don’t need analysts in a bull market, and you don’t want them in a bear market” – most of them simply follow price action and are rarely proactive.
It is only fair to say that we are still in a “market of stocks” environment, but since there has been a noticeable uptick in volatility, the prudent thing to do is to cut our position size for new entries. There have been a bunch of distribution days lately, but as the saying goes tops are a process, which sometimes could continue for two months or more and in the meantime much of the correction will take the form of sector rotation. Remember that sentiment changes slowly in trending markets (up or down) and extremely fast in choppy, range-bound markets.
Do you know what will happen once the whole market turns over for a real 10% correction? It will be very fast and it will catch most people unprepared. The market always gives clues, but yet it always manages to surprise the majority of people – it is in its nature. In the meantime, all we can do is to diligently take entry and exit signals in individual names and adjust risk exposure via proper position sizing.
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Have A Great Weekend!