Every couple weeks or so, bears show up and boldly try to call a top, acting like we don’t remember the last time they made the same call. You saw the ton of posts on the potential QE tapering last weekend and the potential negative consequences for equities. Guess what? There is no difference between being early and being wrong, depending on your time-frame of course. If your timeframe is eternity and you don’t take into account opportunity costs, then eventually you will be right – if this is what is important to you. I’d rather make money.

There are two type of markets – trending and range-bound and they come after each other in an endless cycle. Our job is not to complain about divergences and to ponder on the potential impact of central banks’ monetary policies. Our job is to take full advantage of healthy markets and to manage risk.

All stocks that consolidated sideways for the past two to four weeks are breaking out, one after another. This is what happens in trending markets. Price momentum is the catalyst. The fear of missing out trumps the fear of losing. They say that happy people pay happy prices, but bull markets persist because people don’t believe in them. Bull markets climb the proverbial wall of worry. People say that they don’t want to chase and yet corrections last a couple hours. The slightest dips are getting bought.

A bull market will bail you out and it will forgive your mistakes, but if you really want to outperform, you either have to pay attention to sector rotation or have the discipline to stick with your winners long enough to make a difference. When there are so many good looking technical setups out there, it is enticing to jump from stock to stock and chase after multiple small percentage gains. But looking back you will realize that this is not the wisest approach.

Refiners ($TSO, $CVI, $PSX…) and oil & gas svs ($FTI, $COG…) stocks started breaking out on Friday. Many of them are still close to their bases and it seems like the next beneficiary of an ongoing sector rotation, so you might want to pay attention to this sector. The success rate of breakouts will depend a lot on the price action in crude oil.

It is absolutely amazing how energy and basic material stocks could stay near multi-year highs given the strong price action in the U.S. Dollar. Other cyclicals have also been extremely strong – financials, homebuilders, industrials, even semi-conductors under the surface.

Short squeezes continue with full force and happen even in stocks with questionable fundamentals. In fact, big short squeezes always happen in stocks with questionable fundamentals. Their short interest would not be high, if everything was dandy there. I guess this is one of the reasons why two of the most controversial industries of the past few years have been leading in the past month or so – solar and education stocks.

Large ticket stocks like $PCLN, $CRM, and $GOOG are charging higher and for a good reason – the fastest way to gain market exposure is via high-liquid, high ticket momentum stocks.

There is always something to worry about. Yes, it is getting a little frothy out there with recent IPOs running wild. By no means, it is “1999-kind of” wild. Actually, IPOs outperforming is a good sign of risk appetite.

The new all-time high list is super-diverse and the number of stocks making annual highs is at levels last seen in 2010. Usually extreme levels lead to some form of mean-reversion, but trends could continue longer than contrarians can remain solvent. And as we have talked multiple times on this site, sometimes being a contrarian means staying with the underlying trend.

Knowledge is to know what you have to worry about. Wisdom is to know when it matters.

For the week, the St50 index appreciated by 1.8%. Quite a few of the St50 stocks are extended after the move they had in the past three weeks. A consolidation of some form, through price or time won’t be a surprise. Some of the better risk/reward setups from the list for next week include: $COG $AMBA $MELI $FTI $PANR $MANH $CMG $EFII $GNC $EVER …

See the daily charts of the St50 stocks on finviz; also weekly charts. Take a look at the About section to gain my perspective on how to use the St50.

You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.

Have A Great Weekend!

St50 May 20 Added May 20 Removed May 20

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Post By: @BenCBanks 

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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.

• Speaking of housing recovery themes, regional banks stocks are setting up: $EVER $BPOP $HAFC

• 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.

See the daily charts of the St50 stocks on finviz; also weekly charts. Take a look at the About section to gain my perspective on how to use the St50.

You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.

Have A Great Weekend!

St50 May 13 Added May 13 Removed May 13

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The consensus opinion has been that market averages are working on a rounding top. Last week, the market laughed in the face of the consensus opinion and broke out to new all-time highs. This time the rally was led by the right sectors – cyclical. Tops are a process, which could continue 3-4 months, they are always hard to identify in real time and there could be several sector rotations while they last.

The least treacherous way to understand financial markets is to comprehend the incentives of its major market participants. What would you do if you were an underperforming and underinvested manager coming into May? Do you stay on the sidelines and hope that the market will correct so you could buy the dip? Do you chase extended consumer staples, healthcare, and utilities? Or do you turn your attention to fresh breakouts in highly-liquid, high-beta stocks?

Some of the wisest words ever said about the stock market belong to Sir John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” It is hard to define the current market stage as euphoria. There are still a lot of skeptics out there (skeptics = underinvested or short). Hedge funds are net short and dangerously underperforming again, which might spark a new chasing spree. Maybe this explains the sudden surge of interest in large cap tech stocks ($QQQ). Nasdaq 100 underperformed severely in the first four month of the year.

Momentum stocks outperformed by a wide margin for a second week in a row. The St50 index gained 3.42%. Only a few stocks lost ground, most notably $LNKD. LinkedIn absolutely crushed analyst estimates, but it was light on guidance – which was a good reason for many to take profits. The pullback is understandable. Expectations have been incredibly high, plus the stock had doubled in the six months before the last report. Its long-term trend is still intact, but let’s see at which moving averages buyers will step in again. A pullback to its rising 100dma or 200dma won’t be a surprise.

On the upside, there were 15 St50 stocks that gained 5% or more for the week and they belong to a wide variety of industries – restaurants ($RUTH), metal fabrication ($GTLS), 3D printing ($PRLB), $EXLP (oil & gas equipment)…

We don’t know if the latest breakout to new highs is a bull trap. Given the recent fakeouts, it is normal for many market participants to be cautious and watch with disbelief. This is exactly why the most surprising move that could happen in May is for the averages to climb higher. It doesn’t mean that it will surely happen, but we need to be open-minded to any scenario.

How do we know that the market is healthy? Stocks that went sideways for the past two months or so are finally breaking out and holding their gains. While the current market is meeting that requirement, it doesn’t mean that we should mindlessly chase already extended names. It makes a lot more sense to focus on fresh breakouts.

Some of the St50 stocks that are currently not too extended: $MON $CMG $TRLA $EVER $FTI $GPS $IFF $CREE $WDAY $KORS etc.

See the daily charts of the St50 stocks on finviz; also weekly charts. Take a look at the About section to gain my perspective on how to use the St50.

You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.

Have A Great Weekend!

St50 May 6 Added May 6 Removed May 6

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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.

Near the end of the week, restaurant stocks started to perk up. $CAKE and $TXRH broke out and tagged new all-time highs. $RUTH and $CHUY are right behind them.

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.

Some of the better looking setups for next week include: $WDAY $MELI $SODA $GNC $IMPV $FNGN $DNKN

See the daily charts of the St50 stocks on finviz; also weekly charts. Take a look at the About section to gain my perspective on how to use the St50.

You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.

Have A Great Weekend!

ST50 APR 29 Removed April 29

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