Market Of Stocks Or A Calm Before The Storm

August was a challenging month for all asset classes. The escalation of turmoil in the Middle East added to the noise. All major indexes declined close to 2% last week. The ST50 index shed 0.81% for the week, because most momentum leaders consolidated through time rather than through price.

A new month is due after the long weekend. It is almost fashionable to be bearish in September. The three main arguments are tapering, the possibility of a war in the Middle East, which could further boost the price of oil and the infamous chart showing the record levels of margin.

The topic about tapering has been chewed since May. Its potential negative impact on assets is well known. Capital markets tend to over-discount identified risks. At this point, even my grandmother has heard of tapering. The only people that think it will have a sustainable negative impact on stocks are journalists, whose job is to earn eyeballs and pageviews, not manage money.

If there is a war in Middle East, it will likely last a couple weeks. Its potential impact on oil prices has already been discounted, maybe over-discounted.

Regarding the margins at record levels chart – it has been used as a bearish argument during the entire 2013 and has not mattered at all. At some point, it will. margin debt

Investors have been extremely reactive to slight market changes. A few down days in a row and sentiment turns bearish. A few up days in a row and sentiment turns bullish. Such frequent change of mind is typical for range-bound, choppy markets. There are two explanation of this phenomenon:
1) overinvested (on margin) market participants are afraid that leverage could kill them if the market declines further
2) underinvested market participants are afraid that if the market makes new highs, they will be left behind and under-perform again, which means they are likely to lose clients.

The whole situation has made technicals extremely important. Lower prices are likely to lead to more selling, margin covering and even lower prices. Higher prices are likely to lead to more buying, chasing and even higher prices.

The distribution days are piling in. Staying below their declining 20dmas, the indexes look vulnerable to further downside. Bearish setups have been extremely unreliable this year, but there is place and time for every strategy to work. Investing and trading are all about conditional thinking. If $SPY loses $163, it is likely to test $160, then $155.
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The market environment remains challenging. Breakouts lead to 4-5% moves and then fizzle quickly. Most leading stocks are either breaking down and testing their rising 50 and 100dmas or consolidating through time in best case scenario.

$DDD attempted to break out last week, but the gravity of the market kept it at bay. The whole 3D industry has shown relative strength throughout the month of August. If history is a good indicator, this means that it will outperform once the market averages recover.

It is Christmas in September for gadget lovers. Samsung and Apple are expected to reveal new products. The rally in select semiconductor and tech license stocks is not an accident. The market is discounting the potential impact of new products on their sales. $INVN, $CRUS, $MPWR, $SWKS, $NXPI among others stood out in the sea of red last week.

There are still plenty of setups on the St50 list. $MDSO and $N made a good impression on Friday and are near breakout points. We always take new setups when they trigger, because we don’t know in advance which setups will fail, which will deliver a small gain and which will turn out to be a home-run. It is true that during choppy market environment, most setups fail. It is also true that many future market leaders will break out to new highs while the indexes are still struggling. The only thing we change is position size and the current market environment calls for a lot smaller position sizes.

How To Get A Free Ticket To Stocktoberfest

Stocktoberfest is an incredible 2-day event, where experts representing different markets and asset classes (stocks, bonds, venture capital, angel investors, founders) collide and share knowledge, laughs and drinks. The weather on Coronado is not bad either.

Last October, our presentation was titled: Big Trends – How To Find Them, Ride Them and Get Off.

During the event, we highlighted $DDD, $SSYS and $PRLB as stocks with at least 20-30% more upside potential and those stocks more than lived up to the expectations. This year, we intend to give a presentation about the IPO market – how it has changed over time and how to profit from it.

Here comes the good news: all Annual subscribers to the ST50 Premium will receive a free ticket to this year’s Stocktoberfest in Coronado, CA (Oct 17 and 18) – one free ticket per subscriber.

You could sign up for the ST50 Annual here.

If you plan to attend, please register as soon as possible, because the offer is valid until we run out of seats.

We hope to see you there!

When Is A Stock Considered Broken?

My friend, Phil Pearlman asked a bunch of prominent traders “How do you know when a stock is broken” and since the good doctor shrank my answer for presentation purposes, I decided to post it here in its entirety:

Don’t forget that one investor’s garbage could be another investor’s treasure, so the whole concept of a “broken” stock is very subjective.

With that in mind, a good rule of thumb is:

1) Stocks that are making new 52-week lows during bull markets are usually there for a good reason. Stay away from them. If a bull market cannot lift them up, there is an inherent weakness that is not fixable or discountable overnight. Example – coal and gold miners over the past 2 years. Stocks don’t just switch from a state of being in a downtrend to a recovery mode just like that – there is a long, boring period of accumulation in between; therefore don’t worry that you are going to miss the bottom. You want to miss it. There are always better places to allocate your capital.

2) When a momentum high-flyer breaks its uptrend, it is in a no-man’s territory – a place, where momentum investors are gone or short; also a place, where value investors are not interested yet. There are no motivated buyers and the number of sellers increases with every downtick. When a momentum leader closes below its 50-week moving average, consider it a a big warning sign. $AAPL did that in November 2012, when it was trading at $550. It went below $400 in the following 6 months.

I wrote on the subject last year too: This is How Upside Momentum Often Ends

Think Different

There is a saying that in the stock market, the obvious rarely happens and the unexpected constantly occurs and it is true. The market could be quite counter-intuitive sometimes. The biggest opportunities are often disguised and exist in industries most people are not willing to touch.

In 2012, the conventional wisdom was to stay away from all Chinese stocks. Their economy was slowing down. Their stock market was a mess. Their earnings numbers were questionable. As a result, only two Chinese ADRs made their debut on U.S. exchanges that year: Vipshop Holdings ($VIPS) and YY Inc. ($YY). Both of them formed solid technical bases, broke out to new all-time highs and never looked back.

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Don’t assume that you know everything. The market is frequently a lot wiser than you and discounts events and processes long before they become mainstream. It doesn’t hurt you what you don’t know, but what you think you know when it isn’t so. Don’t let your biases blind you. Pay attention to price action.

The best performing stocks in any given year are the ones that surprise the most, which means that they are very likely to come from industries no one expects. In late 2011, housing related stocks started to clear 52-week highs. No one believed, because of their horrid performance in the previous few years. They ended up being the hottest sector in 2012. In early 2013, solar stocks started breaking out to new 52-week highs. No one believed. In most people’s minds, they were garbage that should not be touched. Many of them tripled in a few short months.

Every trend needs skeptics and doubters. Otherwise there won’t be anyone left to buy. This is why I always smile when I see people making fun of my investment ideas. It tells me that I am on the right path.

It happens over and over again and it will continue to happen, because this is how the market works. Don’t believe me? Take the advice from much more prominent sources:

To make money, you must find something that nobody else knows, or do something that others won’t do because they have rigid mindsets – Peter Lynch

To make money in the stock market you either have to be ahead of the crowd or very sure they are going in the same direction for some time to come. – Gerald Loeb

You can only make big money by being right about something that most people think is wrong. – Paraphrasing Howard Marks