• osted by Ivanhoff
•on November 27th, 2010
You cannot control what happens to you in life, but you can always control what you feel and do about it. – Viktor Frankl
Market of stocks or a stock market is probably the oldest dispute among market participants. While it is a fact that the process of ETF-ization has substantially increased the correlation between asset classes, correlations tend to change as Keith McCullough points out in one of his missives. This week’s price action in the momentum universe was a clear prove of the latter.
One of the most news-rich Thanksgiving weeks in the market history is behind our back. The equal weighted St50 index appreciated by 2.97%, outperforming the S & P 500 by 383 basis points and the Nasdaq Composite by 287bp (since last Friday’s close). Momentum stocks, led by technology and retail industry groups, destroyed the last standing shorts.
Market averages hide more than they reveal. They opened weak on Monday, reflecting rising fears of “new” sovereign debt crisis in Europe and a potential war on the Korean Peninsula. High relative strength momentum names did not get the message and continued to steam ahead. Liquidity trumps fundamentals. Mood trumps headlines.
We are entering the last month of the year, when performance anxiety will be a leading factor in institutions’ decision making. The strong are likely to get stronger as capital is re-allocated to the best performing names.Wednesday was the most friendly trend following day since September 1st. Breakouts were plentiful as more than half of the stocks in the St50 made fresh 3-year highs. We advised to lock in some gains in overextended positions as unrealized profits in momentum names can disappear quickly.
In this edition of the St50, you will notice significant changes in the list as many of the long-time members did not make it to the top 50. Stocks like $CMG, $RVBD, $FFIV, $BRCM, $ALTR, $TQNT, $TRS, $IGTE had tremendous moves to the upside over the past few weeks and have become dangerously overextended. The St score is designed to discount euphoria and distribution signs, based on recent price/volume action and changes in the average daily range. Once those fundamentally sound stocks set up again and offer less risky buying point, they are likely to come back on the list.
On Black Friday, most stocks opened in red in sympathy with the discounts that all retailers typically offer on that day. While most citizens were waiting in line in front of Wal-Mart and Best Buy to get another 70” TV, shrewd traders took advantage of the weak opening and backed up the truck on their favorite names. This market action occurs for a second year a row. We might as well make it a tradition. The underlying reason was similar – rising fear of another sovereign debt crisis. Last year, it was Dubai. This year, it was Ireland and Portugal.
Macro factors don’t matter until they do. The market is a forward looking mechanism. It tries to discount events and processes that haven’t happened yet. As a result, it often discounts events and processes that will never happen. In a short-term perspective, price action is the single most powerful leading indicator.
ST50 is a powerful equity selection tool. Equity selection is a necessary, but insufficient condition for consistent market success. Disciplined risk management is needed for the latter. Patiently wait for the highest probability setups in the strongest stocks to develop before you commit any capital. Or as Ed Seykota likes to say, be like a lizard:
The lizard … just hangs around on the rock … and waits and waits and waits … for his pattern to show up … and when a bug comes along, he makes his move, right from the gut, without thinking about it. Moral: When trader becomes that automatic, then he, too, can hang around on a rock and catch a lot of bugs. |
发表于 2010-11-28 13:26
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