Market Of Stocks Or A Calm Before The Storm

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  • on August 31st, 2013

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.
Screen Shot 2013-08-31 at 7.56.12 AM

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.

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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