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.
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