If happy people pay happy prices, then what prices pay under-invested and under-performing asset managers? I will tell you what price – any price. If the rally in January was born out of an outside catalyst (less bad than expected new taxes), the rally in May has been led by pure momentum and fear of missing out, where managing career risk has gradually become more important than managing market risk.
Every couple weeks or so, bears show up and boldly try to call a top, acting like we don’t remember the last time they made the same call. You saw the ton of posts on the potential QE tapering last weekend and the potential negative consequences for equities. Guess what, there is no difference between being early and being wrong, depending on your time-frame of course. If your timeframe is eternity and you don’t take into account opportunity costs, then eventually you will be right, if this is what is important to you. I rather make money.
There are two type of markets – trending and range-bound and they come after each other in an endless cycle. Our job is not to complain about divergences and to ponder on the potential impact of central banks’ monetary policies. Our job is to take full advantage of healthy market and to manage risk.
All stocks that consolidated sideways for the past two to four weeks, are breaking out, one after another. This is what happens in trending markets. Price momentum is the catalyst. The fear of missing out trumps the fear of losing. They say that happy people pay happy prices, but bull markets persist because people don’t believe in them. Bull markets climb the proverbial wall of worry. People say that they don’t want to chase and yet corrections last a couple hours. The slightest dips are getting bought.
A bull market will bail you out and it will forgive your mistakes, but if you really want to outperform, you either have to pay attention to sector rotation or have the discipline to stick with your winners long enough to make a difference. When there are so many good looking technical setups out there, it is enticing to jump from stock to stock and chase after multiple small percentage gains, but looking back you will realize that this is not the wisest approach.
Refiners ($TSO, $CVI, $PSX…) and oil & gas svs ($FTI, $COG…) stocks started breaking out on Friday. Many of them are still close to their bases and it seems like the next beneficiary of an ongoing sector rotation, so you might want to pay attention to this sector. The success rate of breakouts will depend a lot on the price action in crude oil.
It is absolutely amazing how energy and basic material stocks could stay near multi-year highs given the strong price action in the U.S. Dollar. Other cyclicals have also been extremely strong – financials, homebuilders, industrials, even semi-conductors under the surface.
Short squeezes continue with full force and happen even in stocks with questionable fundamentals. In fact, big short squeezes always happen in stocks with questionable fundamentals. Their short interest would not be high, if everything was dandy there. I guess this is one of the reasons why two of the most controversial industries of the past few years, have been leading in the past month or so – solar and education stocks.
Large ticket stocks like $PCLN, $CRM and $GOOG are charging higher and for a good reason – the fastest way to gain market exposure is via high-liquid, high ticket momentum stocks.
There is always something to worry about. Yes, it is getting a little frothy out there with recent IPOs running wild. By no means, it is “1999-kind of” wild. Actually, IPOs outperforming is a good sign of risk appetite.
The new all-time high list is super-diverse and the number of stocks making annual highs is at levels last seen in 2010. Usually extreme levels lead to some form of mean-reversion, but trends could continue longer than contrarians could remain solvent. And as we have talked multiple times on this site, sometimes being a contrarian means staying with the underlying trend.
This is a reprint of my St50 weekly market review. You could see my latest list here.
