Tuesday, January 27, 2015

While Traders Play Investors Should Stay Away

The current rally in the indices is no different then any other rally we have seen over the past few months. Just as a correction starts to take hold and spooks everyone, the market manages to grip onto several pieces of good news and suddenly rally without much warning. But with every rally attempt, while the indices seem fine, the internals continue to deteriorate.

The ECB quantitative easing program was clearly the catalyst for the current rally as the market started to anticipate its announcement about a week before. Unfortunately, we have to ask ourselves how bad are things really that the ECB has to step in?

The hope from the ECB announcement on Wall and Main Street seems to be that the FED will possibly delay raising interest rates and even potentially reactivate QE. Of course this is not the case as the FED is intent, despite potentially deflationary reading in CPI and PPI over the next few months because of the plunge in oil and gas prices, to try and get ahead of any inflationary pressure or asset bubbles that could arise from such a prolonged period of low interest rates and enormous money printing. The FED will stay the course and start raising rates by the middle of the year, if not as early as March or April, to try and get ahead of the US election in 2016. The FED normally tries to avoid changes in monetary policy ahead of elections to try and appear neutral, and has only a limited window to do so before election season goes into full swing.

The VIX drops quickly with every rally attempt, but continues to make higher lows over the last few months. A strong indication that nervousness is building in the market, while complacency seems to set in real quick with every rally attempt. The buy the dip mentality is firmly in place and the perfect bull trap.

Leading growth stocks look awful. With every rally attempt, the number of stocks able to make any progress diminishes, with this one being particularly very narrow...under a dozen stocks, if that much. The majority of the good, trade able moves occurred in stocks that were reporting over the last two weeks and bouncing off bottoms, not breaking out to new highs, and most needed to be sold before the actual report. Otherwise there was almost no participation to the upside by the strongest stocks that managed to buck the previous pullback in the market. Any stocks that did manage to breakout did so in anemic volume, with little follow through, and diminishing volume as they climbed. The remainder of the consolidations are late stage, wide and loose bases with lagging relative strength.

Medical stocks have led the market for quite sometime but most seem to be asleep while handful are still making progress but are too over extended to chase. Actavis (ACT), Incyte (INCY), and Pharmacyclics (PCYC) broke out to new highs, but ACT and INCY breakouts were in anemic volume. Apple (AAPL) and Microsoft (MSFT) bounced nicely off their bottoms, but stalled around their fifty day moving averages. Apple reports tonight and could be a catalyst to lift the market for a day or two, but MSFT was down over 10% on its earning's report.

Short trading ideas worked very well at the beginning of January, but forced traders to cover them last week as the market turned. Most of the profits could have been booked quite easily by alert traders. The short trading ideas list is still littered with stocks that are pulling back to moving averages to digest previous sell offs and new setups are getting ready to rollover. Not the type of action that would be present if the market were truly getting ready to lift off on a big move.

3D systems (DDD), Gerdau S.A. (GGB), Ford Motor (F), and Juniper Networks (JNPR) are all rolling over near or at their fifty day moving averages, with plenty of others waiting in the wings.

I started to alert traders on Twitter and StockTwits Tuesday, January 20th, that short positions needed to be tightened up to protect profits and minimize losses in new positions, and that several large capitalization technology and medical stocks could run into their earning's reports. Which is exactly what has occurred. At this point, many of these stocks should have been sold before their actual earning's reports, and many others are now starting to trigger tighter stops reducing long exposure to the market.

Traders can continue to hold the few stocks that are acting well still moving into their earning's reports, but should continue to trail a tight stop to protect profits and minimize losses on new positions. Traders should not initiate any new positions on the long side as recent setups have gotten wilder, failing to follow through, triggering tight stops very quickly, and are now lagging a strong move by the indices. A recipe that has been deadly over the past few months for anyone over staying their welcome. Continue to monitor the short trading ideas list for entries too.

We've entered the period where late traders are at risk of being chopped to death while the market, once again, begins to setup another pullback that should turn into a major correction. This has been the theme for the last few months and many hecklers point out how wrong it has been. But, even the buy and hold crowd has not made any progress over the last few months, and would be better served on a long vacation until the market manages a major correction. The easy money has been made, and now the market is in the hands of the traders. So while the traders play, investors should stay away.

Wednesday, January 07, 2015

Why Today's Rally Is Nothing More Then A Short Squeeze

After suffering four to six straight distribution days, slicing through their fifty day moving averages in above average volume, and getting a bit over extended, the Nasdaq, SP 500, and DOW, naturally needed to consolidate their losses. Heading into the close, all three indices were trading up over one percent, but volume has been drying up as the day has progressed.

The VIX spiked over fifty percent during the sell off and continued its pattern of higher lows even as the market made new highs. A clear sign that while the markets were luring traders into complacency, anxiety has been slowly rising, and spiking with every pulback, despite the markets ability to make new highs, quickly, after every pullback.

The short trading ideas list is littered with strong downside follow through and new setups tightening as the market squeezes. Nimble traders who started shorting as short setups started to rollover last Friday and over the last two days, are sitting on comfortable profits even after today's short squeeze. It is hard to find a single short setups from Friday or Monday that has fallen apart or is currently threatening to fall apart. The majority are tightening to resume their downtrends once market selling pressure resumes.

Activision Blizzard (ATVI), Terex (TEX), and Priceline (PCLN) continue to follow through to the downisde, while stocks like Advance Micro Devices (AMD), Waddell & Reed (WDR), and Mattel (MAT), are holding tight near their respective fifty day moving averages ready to rollover.

Leading growth stocks continue to behave poorly. There are almost no long term setups, and the few short term setups that were available can't follow through and are stalling even as the market pushes higher during the day. Outside of a few stocks that could run into earnings, the long side needs to be avoided until there is at least some evidence that leading growth stocks are resisting downside market pressure and nearing breakouts on reversal days. None of this is happening in today's short squeeze.

Apple (AAPL), Baidu (BIDU), and Ali Baba (BABA), held up strongly yesterday and attempted to follow through at the open along with the market. But as the day has progressed, all three stocks have started to stall, even as the market continues to push into new intra-day highs.

Without any solid longer term setups, poor follow through by shorter term setups, weak volume on today's rally attempt, and short positions holding recent gains, the probability of a sustained rally is almost zero. The indices may continue to squeeze to their short term, ten and twenty day moving averages, but be on alert for stalling action as they do.

Traders should use any rally attempt to initiate new short positions or add on to existing short positions. Any long positions that might remain in a traders portfolio that is not reacting to today's rally attempt, should be sold.

Monday, January 05, 2015

Fifth Straight Distribution Day Kills Rally Attempt

Going into Christmas, Santa delivered a rally, but not anything you wanted under the Christmas tree. Outside of the huge rally day on December 17th, the first day of the rally attempt, volume dried up, and the market began to stall as it approached new highs. 

Over the past five days the Nasdaq has suffered five straight distribution days, including today, the SP 500 is working on its third straight distribution day, and the Dow Jones Industrial Average, the first to signal trouble ahead, has suffered five distribution days in the last six trading sessions.

Four to five distribution days in a two to three week time frame is enough to kill any rally attempt. But a cluster of distribution in a weeks time is a clear signal for investors and traders to clear out of the long side and consider shorting the weakest stocks in the market.

Leading growth stocks initially bounced and moved past their moving averages, but in anemic volume, and price performance lagged on a daily basis going into the end of the year, even as the market tried to push higher. Stocks like Apple (AAPL), Baidu (BIDU), and Ali Baba (BABA), appeared ready to run into their earning's reports after clearing or bouncing off their fifty day moving averages, but stalled almost immediately and started to drag the market lower daily, finally slicing back through their fifty day moving averages. The majority of other leading growth stocks barely reacted and lagged during the entire rally attempt. 
Not the type of action traders are looking for during a strong rally. 
Short trading ideas did a nice job tightening up into year end and began rolling over from their moving averages on Friday. Alert traders could have started initiating positions, and adding additional positions this morning on new setups. Foregin banks, UBS AG (OUBS), Credit Suisse Group (CS), and Deutsche Bank (DB), by far the weakest group, were the first to roll over. Continue to keep an eye on the gold (GLD) and silver (SLV) miners (DUST), as that trade is not completely dead yet. High end retailers Michael Kors (KORS) and Coach (COH) have also rolled over at key moving averages. Review the short trading ideas list for additional setups over the next few days.

Writing in my daily journal the same two statements on a daily basis, leading growth stocks lagging again and new setups trapping bulls in and triggering tight stop losses daily, most of the time in the same day, forced me to cash on December 31st, once several of my tighter stops to protect profits and control losses began to trigger. This is similar action we have experienced over the last few rally attempts where the market starts to kill traders by a death of a thousand cuts before rolling over into a new correction attempt.

Those who follow me on Twitter, StockTwits, SeekingAlpha, or LinkedIn, were alerted with the following post on December 31st: "Cash is the best position going into the New Year. Leading growth stocks behaving poorly."

Traders should be clearly out of any long positions, and investors can probably pack up their bags for a little while. In fact, long term investors could have spent the past few months on vacation.

The market may still attempt to rally into earning's season, but any attempt will most likely be lead by a narrow group of growth stocks that are expected to deliver strong earnings. The remainder of leading growth stocks are going to need several weeks, if not months, to consolidate and digest the two year, almost unabated, bull run.