This is one resilient, tricky market. Just when it looks ready to crumble, it has a monstrous recovery. Just when it looks ready to rally big-time, it reverses and corrects. Strong weeks are followed by weak weeks and vice versa. As a consequence, the market benchmarks have basically gone nowhere since early March. There is nothing wrong with that. Individual stocks have provided great opportunities in terms of both breakout and mean-reversion kinds of setups.
Where bears see divergencies, bulls see sector rotation. Healthcare names finally pulled back and underperformed for the first time in 2013, but cyclicals took the lead. Homebuilders, semiconductors and financials broke out to new multi-year highs, just when they looked the most fragile they’ve been in awhile. Small caps and momentum stocks outperformed too. The St50 index gained 2.18% for the week.
Emerging markets ETFs still look vulnerable and if there is a leg lower, they will probably be attacked first for being the weakest link.
Beaten down basic materials took a breath and had their mean-reversion moment – gold, silver, crude oil, and steel bounced but are still in a down-trend, therefore guilty until proven innocent.
The U.S. government might be cutting its spending, but the U.S. consumer is more than compensating, resulting in healthy GDP growth. Now, we know why all consumer stocks have been outperforming by a wide margin over the past month or so. Price action is simply much better at predicting the news than the news is at predicting price action.
The three industry groups that saw the biggest capital inflows were homebuilders, solar and casinos. Also, stocks with very high short interest continue to mock the sophistication and spreadsheet analysis of bears and squeeze the hell out of them. Just this past week, we saw stocks like $NFLX, $ANGI, $TSLA, $BONT and $BOFI charge higher, fueled by short covering. Good candidates for next week are $SODA, $P and $GNC. Sometimes, being a contrarian means staying with the underlying trend.
By now, it is fair to say that most market participants have been conditioned to buy the dips in this market, so when a correction comes it will likely find most unprepared. It is anyone’s guess when it would happen. Divergencies and distributions days have not been of good use lately. Pay attention to price action in Japanese Yen ($FXY). There is an ocean of money involved in the Yen carry trade, so if the Yen reverses higher, it will surely puts downside pressure on equities.
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Have A Great Weekend!