It Is A Very Choppy Environment, But Opportunities Abound For Nimble Traders

The S & P 500 lost 1%, Nasdaq 100 lost 1.5%, small caps shed 0.5% and yet overall there were more stocks that went up 10% for the week (54) than went down 10% for the week (42). It continues to be a market of stocks environment with good opportunities for both bulls and bears, who know how to manage risk. The ST50 list finished the week flat (gained 3 basis points) outperforming the indexes by a good margin.

$SPY tested its rising 50dma for a second time in two weeks. Technicians say that the more one level is tested, the weaker it becomes and the more likely to be taken out. A break below the 50dma is not the end of the world. Many trends test their longer-term moving averages before they resume higher – 100dma, 200dma and even the 50-week MA.

spx

It is a very choppy environment, but opportunities abound for nimble traders who have managed to adjust to the range-bound market environment. Most of the trends last up to 2-3 days before there is a major price reaction. We need to start every day with an open mind and be prepared to see everything.

Three industries stood above the rest last week:
- restaurants: tepid inflation coupled with rising consumer confidence and pure price momentum send stocks $CHUY, $SONC and $RUTH at new multi-year highs. There are a lot more names in the group that are hovering near 52-week highs: $CMG, $TXRH, etc.
- media: the ongoing consolidation in the field is re-pricing the whole TV broadcasting industry. Many of the stocks in the group gained more than 5% last week: $SBGI, $NXST, $SSP, $TVL, etc.
- mortgage investment companies were among the best performers in 2012 and it looks like are returning back to fashion: $OCN, $HLSS, $NSM, $ASPS, etc.

Patterns repeat all the time in financial markets. The only things that change are the names of the symbols involved. Corrections through price and time are a normal stage of any liquidity cycle and they should be embraced as playing a crucial role in the discovery of future leaders. The silver lining of all market corrections is that they highlight the strong stocks with organic demand or real alpha. Pay attention to stocks that make new 52-week highs or gain more than 3% on big down days. For example, during the selloff on Wednesday, one of the very few stocks that made new all-time highs was $CSOD. Then, it proceeded to spike more than 5% near the end of the week.

Most stocks dipped on Friday, when the $SPY struggled just below its already declining 20-day moving average. Here are six St50 members that showed relative strength:
RS June 14

In the book Hedge Fund Market Wizards, one of the featured traders (Jamie Mai) talks about two types of risk – identified and unidentified:

Markets tend to over-discount the uncertainty related to identified risks. Conversely, markets tend to under-discount risks that have not yet been expressly identified. Whenever the market is pointing at something and saying this is a risk to be concerned about, in my experience, most of the time, the risk ends up being not as bad as the market anticipated.

There are two major macro factors that seem to account for the majority of the recent market volatility:
- the re-winding of the Japanese Yen carry trade
- the discounting of potential tapering in the FED’s open market operations

The big question is how much of those risks have already been discounted by the market? They have already been covered extensively by the press, which by no means guarantees their impact will be reduced.

What I wrote about the market on June 6th continues to play out:

There is still plenty of risk appetite for buying dips in select U.S. equities. Today’s bounce does not change the big picture. We are still in a range-bound market environment with elevated volatility – an environment that is known to produce a lot of fake breakouts and breakdowns and be more favorable to mean-reversion setups from important technical levels. This does not mean that the market won’t look strong or weak for 2-3 days in a row. It will look strong or weak long enough to convince most market participants to lay in one direction and then it will swiftly pull the rug under their feet.

With that in mind, there are still plenty of opportunities for nimble traders that manage to quickly adjust to the new market environment and realize that many breakouts and breakdowns are likely to deliver a lot smaller gains than what we got used to in the first 5 months of the year.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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