Under the hood | stockbee


Under the hood

The indexes are hiding the correction in momo leaders. If you just look at the indexes you will feel like market is having a just mild pullback. But the stocks that were up most in last one year or six month do not show that good a picture.

If you go and look at the Stockbee 50 data from few months you will see most top ranked stocks have reversed and some are down 30% plus in few weeks. This clearly shows rotation out of high relative strength stocks.

That is how momentum works. Stocks go up for long period of time with mild  and orderly corrections. At some sage late stage and euphoric buyers start bidding up shares to unsustainable levels. People start believing all kinds of rosy scenarios. If you see the action in 3D sector, it shows classic case study in this effect. Any thing and everything in that sector was going vertical for few weeks and now reversed hard.

The other speculative sector getting hit hard is recent IPO's. Many of them doubled on day one and now are steadily giving up gains. This is one of the reason why one should not buy IPO's on first day in post market. But when speculative sentiments are extremely bullish this happens again and again. Companies and merchant bankers exploit the excessive bullishness to push out as many IPO's as possible.

While the momentum leaders are getting hit, it is a not a broad based selling. Number of stocks continue to hold up well and there are signs of sector rotation. If you look at expanded set of stocks with confirmed momentum on yearly or 65 days basis, you will see large number of them are holding up well and many are having series of narrow range days. That kind of action can be hint of further gains ahead for those stocks.

Sentiments continue to be at very bullish levels and that might act as a damper on further big gains till year end . A muddled choppy range looks likely scenario. Which is not bad for being selective in picking your setups.

One of the setups showing up in Stockbee Trend Intensity Breakout scan yesterday was CBOE. Stock has confirmed momentum on 65 days and one year time frame. Had high volume breakout from a multi week range. Stocks in the sector are rallying and confirm this sector move. 

No comments: