This continues to be one of the most feared rallies of all times. Coming into 2013, 99% of the world’s strategists were overwhelmingly bearish and very cautious, so when the indexes gapped on January 2nd, psychologically it felt like chasing and most people just watched equities climb in disbelief. By the time many investors became comfortable with bigger exposure to equities, the market entered into a sideways consolidation phase, which whipsawed so often so many that it conditioned most people not to trust breakouts and breakdowns.
The important question today is if history will repeat itself. Indexes have just recently broken out to new multi-year highs after a couple months of consolidation, just when most expected a correction due to seasonal factors. I see people’s reactions on StockTwits, Twitter and the financial blogosphere every day. Most market participants are still extremely skeptical. People still don’t believe this rally. They seem frozen. Could the month of May be just like January? Market seems extended, but it certainly could surprise more to the upside.
Last week started with a major boom in Chinese internet and consumer discretionary stocks. $QIHU, $SOHU, $YY rocketed higher. Was it just a minor speculative frenzy of hot money chasing return or a signal that the world is starting to look at China as a more balanced economy, where consumer spending plays an important role for growth? Too early to tell, but certainly something to ponder on.
Solar stocks keep grinding higher as still very few believe the trend. $SCTY, $SPWR, $FSLR, $CSIQ are near 52-week highs. Every trend needs doubters and skeptics, otherwise there won’t be anyone left to buy.
The best performing stocks in any given year are usually the ones that surprise the most; therefore they are likely to come from industries no one expects. One of the most powerful combination of catalysts is: new 52-week high + high short interest + very negative sentiment. So negative, that people don’t even want to listen to you when you start talking about that industry. The only way to make big money in the market is by being right about something that the majority of people are wrong. Solar stocks have been the big upside surprise this year. Housing related names were the big theme last year.
What else happened last week?
- Momentum stocks continue to outperform. The St50 gained 2.4%.
- Housing-related names started to break out again after consolidating for the better part of the past couple months – $LL (lumber), $RH (furniture), $BECN (building materials), $TXI (cement), etc.
- Specialty chemical are on the move again. I particularly like $POL
- After a short break, healthcare names are seeing some buying interest: biotech, generic drugs, medical appliances – $ABMD, $ALGN etc.
- The Japanese Yen continues to get poleaxed and it seems every hedge fund out there is short the Yen, long Japanese equities. Long-term trends exist, because people react gradually to new information. Some might made the argument that the theme is a little bit overcrowded and it has been extensively covered by the media, so a brief shakeout of the weak hands should not be a surprise.
- Asset management firms and brokerage houses spiked higher as the recent outperformance in equities is attracting more conservative money from the sidelines and bonds;
- All in all, short-sellers didn’t have a place to hide.
There are always reasons to be cautious. We just have to know when to pay attention to them:
- Bears continue to point out to the margin levels, which are near multi-year highs, but they have been there for months. Yes, eventually it will matter, but “eventually” could continue longer than most people could remain solvent as short-sellers in $TSLA, $GMCR, $NFLX, $TZOO, $SODA have recently learned;
- There was some selling pressure in junk bond on Friday (May 10th), which has been a good indicator of receding risk appetite. Keep an eye on this development, but know that one day does not make a trend.
- And yes, market breadth has been so amazingly good, that some sort of mean reversion feels natural, but the market rarely does what feels natural and it is expected by the majority.
Don’t over-focus on macro arguments. Chasing is never smart, but keep in mind that it is a market of stocks. Focus on individual setups. I have said it here a thousand times – in up-trending markets, corrections take the form of sector rotation. While the leading sectors are consolidating through time or price, others will take over.
You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.
Have A Great Weekend!