Last weekend, we woke up to the news that a banking crisis in Cyprus could “sink” the world. A week later, the indexes are where they were seven days ago. So far the Mediterranean island’s saga is turning out to be nothing more than another geography lesson.
In general, mean-reversion setups produced better results than breakouts. This usually happens in the beginning stages of a market correction, but we also know that corrections in bull markets take the form of sector rotation.
They say that the market is better at predicting the news than the news is at predicting the market. Last week delivered another strong set of numbers from the homebuilding industry, sending many of its members to new multi-year highs. ($DHI, $KBH). The momentum in the group cooled off near the end of the week, so it seems that it will enter a period of consolidation – either through price or time.
This is not your full-scale, all-forgiving, bull market of January. Look at some of the damage done in retailers ($LULU, $MOV), biotech ($PCYC), mortgage originators ($OCN, $ASPS) and economic bellwethers such as $FDX. You cannot just close your eyes and buy any dip, hoping that a strong market will bail you out. You have to be a lot more selective as the current market environment is the poster child example of “a market of stocks.”
There has been a notable surge in momentum stocks’ volatility, but there are also plenty of stocks setting up near 52-week highs. The risk of being out is still perceived as bigger than the risk of being in. The party is still going on, but it makes a lot of sense to decrease position size a bit. This is not the time to chase blindly and use leverage. It is more of a “hit and run” market.
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Have A Great Weekend!