There is persistent bid in the market but the leadership is narrowing. The rotation theme continues with new sectors breaking out and many sectors that were doing well topping or correcting.
So laggards are now breaking out. Low priced stocks are working. Speculative stocks are working. Earnings breakouts are working.
Gold stocks after a correction seems to have found a bid.
Unless the market quickly has a breadth thrust we will continue to be in range. A 2 to 4 weeks churn at this level would be constructive scenario. That kind of scenario will mean whipsaw territory.
The other possible scenario is narrowing leadership and over extended setup will result in a 5 to 10% correction at some stage here.
The third scenario is complete melt up with stocks going up like there is no worry.
All three are possible. At this stage evidence suggests the first and second scenario more likely.
Like in a stock one needs to look for a setup same way you need to look for a setup in overall market. Unless you are a day trader, you will find there are setups in market where it is extremely conducive to build concentrated positions and just sit in them. Then there are setups in market where you need to minimize your risk.
Whenever a market has 10% correction and then breaks out on breadth thrust is the time to build concentrated positions and sit tight.
Whenever market goes up 20% plus in few months is not a setup where you build concentrated positions and sit tight on them. Sometime it might work but most often it has a probability of your trading career being terminated.
When a market has 10% plus kind of correction the funds and large speculators are in cash or short. Most stocks at that level are down 25% plus in a quarter. Few stocks during that phase make 25% moves. Those that make those moves can often be counter cyclicals and not necessarily leaders.
Even the best of growth stock at that stage will be down 25% or more or would be going sideways. At some stage some of the growth stocks attract buyers and instead of going down they go in wide range or sideways pattern. When the market has positive breadth thrust at that level those stocks start breaking out. If you can at that stage identify the right stock and get in to it and sit tight then you are rewarded. That is what CKbergin is talking about when he says buy 4 positions of 25% each.
When the market keeps going up for some months and when breadth reaches extreme positive territory you have almost every stock up 25% plus in a quarter. Now not many stocks are left to make big move. At that stage whatever is still lagging the market has some reason why it is not being bought during the market advance. At this stage while individual stocks might make big moves overall the big speculators and funds who were buyers at the extreme negative breadth level start distributing stock to willing buyers at those levels. Needless to say there is never a shortage of fools on the street plus low skilled investors always keep entering the market.
While buying at extreme level of breadth negativeness is sudden and there is a stampede to get in to stocks by funds and professionals like CKbergin and his friends , the situation at extremely positive breadth level is very different. Stocks are very silently distributed to bag holders. At some stage once the large funds have done their distribution then the market breaks down.
Practical example of this you will see everyday. Couple of weeks ago I was talking to a member who wanted to build a big position in F , he asked for my advice and I said I would not do it. That time F was forming good sideways pattern and there was lot of coverage of F in media as successful turnaround. I think the CNBC jester was also pumping F. On blogs and Stocktwits many were bullish on the story. And this member bought the position now rest is history.
When was F a buy . When it was at 4 or when it had correction around 10. The story was now so apparent and the people who believed that F is going to further double from here and putting the stock in their IRA as permanent hold are the kind of people Wall Street loves at extreme positive breadth level.
Same story happened on Tata Motors. In 2008 and 2009 I was recommending Tata Motors to all my Indian friends and my relatives and I made my mother in law buy it at distressed level in her portfolio at that level. It was her biggest position at that time.Very few people bought it at that level. Last month I went for a birthday party at a Indian friends place where I had recommended TM two years ago and also last year and then one person after watching it go up so much and reading about it as successful turnaround bought it just before the drop.
Same way I was watching utter bullishness on FFIV few weeks ago as if FFIV is next CSCO and some were putting it as their single best idea for next year. What happened.
This story and cycle has been repeating for more than 100 years on the street. Stocks are accumulated at 10% plus bearish correction level when the retail traders and mom and pop investors are to scared to buy and then they are systematically distributed as market reaches extreme breadth level. The game never changes only the bag holders change.
Breadth based models like Market Monitor, Or CKbergin's timing model based on $BPNYA or Hectors Market Timing models try and identify such extreme levels and get out of market when risk of being bag holder increases. The tactics used in those models might be different but the underlying concept ins same.
At this stage after the August 2010 bottom from which market has rallied 25% plus , all such market breadth based models are showing the same thing. That we peaked at extreme breadth level . Most of these kind of market timing models have good historical track record of getting it right. But there can be exception periods where market does not confirm to the model or market confirms to the model after a lag period.
Life is wonderful when you have not spent time studying these things.Because then your decision making is not influenced by such historical precedent. If you know these things and if you experienced some nasty corrections in your trading life you become cautious and think and act differently. That is why as you age on Wall Street you become more and more risk averse and try and stay ahead of big funds and speculator as far as possible.
This is the kind of background which drives SA on day to day basis.
The objective is always to make lot of money but at the same time avoid drawdown to the minimum. Does the overall market presents compelling setup is always the fundamental question at back of the mind when looking at any profit opportunity.
At this stage my answer is it is not a compelling setup. So I am adjusting tactics and playing small.
Everyone has different risk tolerance and life situation. After having successfully survived this game for last decade today I am extremely risk averse. At slightest hint of risk I take my marbles away and get out of the game. That thinking applies to market as well as individual position. In my experience if a stock does not act right immediately after entry it is unlikely to work. Same way market should confirm a bullish thrust in few days otherwise alarm bells should ring.
