Last week started with fireworks and ended in flames. High volatility after a prolonged uptrend is a sign of distribution. Ever since the major reversal on May 22nd, market indexes have been in a distribution mode – choppy, range-bound environment, characterized with a large number of fake breakouts and breakdowns and where most trends last 2-3 days before there is price reaction.
An hour before the FED’s briefing on Wednesday, everything looked rosy and the S & P 500 was within a striking distance from testing its all-time highs. The St50 list was up 3.5%, four of its stocks were up more than 10% in a couple days, another ten stocks were up 4%+. Then Bernanke came and said that the economy is improving and tapering of the FED’s open market operations is within sight. The market reacted like child, whose birthday party has been canceled and staged a massive selloff. The St50 list finished the week down 1.55% and while it outperformed the $SPY and $QQQ, the technical damage to many of the leading stocks was notable and it will take some time to be repaired.
Financial markets have been discounting FED’s withdrawal since the end of May. Look at the massive rally in the yields and the epic selloff in the most interest rates sensitive assets. The 10-year yield has gone from 1.6% to 2.5% in six weeks. The REITs ETF ($IYR) is now down for the year after being up 20% by mid May. Emerging markets ($EEM) and long-term Treasuries ($TLT) hit new 52-week lows.
The silver lining of last week is that at least now we have some certainty in regards to FED’s plans and targets. Identified risks tend to be over-discounted by the market. While we might get a few more weeks of elevated volatility and forced liquidations, a good earnings season could get us back in everyone’s favorite “market of stocks” environment. Next earnings season starts in mid July.
The big question for the next few weeks is if the accelerated distribution and elevated volatility will turn into forced liquidation and clear downtrend. After a few big down days, the mood is always gloomy and it is easy to be pessimistic. The market in June has proven to surprise and mean-revert just when most have positioned themselves in one direction, so I think we will see more of the same.
New leaders always emerge out of market corrections and they are likely to appear on the St50 list before the meat of their moves. It is always worth it to pay attention to relative strength in weak markets.
Regional banks ($KRE) held their ground better than most last week. We even saw a few breakouts to new all-time highs ($SBNY). The steeping of the yield curve is positive for the group.
Last week, we talked about the major re-pricing in media stocks. Many of them showed incredible resilience during the pullback and are hovering near multi-year highs: $SBGI $NXST among others. It is a group that deserves special attention.
Also, contrary to the popular perception that defense stocks should take a massive hit from the sequestration, many of them have managed to have a very decent 2013 and are holding near all-time highs: $IRBT $TDG $GY.
There is a strong underlying bid for small and mid cap software and cloud stocks too: $WAGE $TYPE $ULTI $CSOD $EPAM $VNTV…