Author: Ivanhoff

Focus on Strength

3 back to back green days for the market averages with $QQQ breaking above its 50dma intraday and reaching levels not seen since August 2nd. None of the macro issues have been resolved, but they never will be. For better or for worse, the market has a short-term memory and is capable of rallying in any environment.

The mainstream media continues to mass produce apocalyptic news, because this is what attracts the most attention and sells the most. When the current challenges are solved, it will come up with something else to worry about. It always does. People do what they are incentivized to do, and TVs and newspapers are incentivized to produce noise. The good news is that you can fully ignore it when it comes to making your trading and investing decisions.

Focus on strength, take your entry signals and diligently cut your losses. Loss cutting is not practiced only to protect capital against major drawdowns, but also to consider opportunity cost – there are always other stocks that are breaking out or down. If one idea does not work, just move to the next.

Take a glance at $STMP, which has become the latest posterchild of why relative strength matters. When a stock is up 3% and advancing while the market averages are down 2%, take a note. This stock is likely to outperform when the market turns north. BTW, $STMP is extended at this point and this is not the place to chase it.

Let’s take a look at the breadth:

25 stocks closed at all time high: $STMP $FCFS $PSMT $MJN $EDU $UAN $ORLY $ATHN $QSII $CPA $RL $AZO $CERN $PGN $LQDT $AKRX $ELGX $NI $WPRT $DLTR $SO $ACTG $MLNX $CASY $HITK

Other Stocks that are less than 5% from their all-time high: $VRUS $MAKO $KEYN $STAA $AMZN $MA $ALXN $JAZZ $ULTA $HANS $EVEP $MG $TNH …

120 liquid stocks gained 5% or more today. 35 of them reached new 20day high. Some of them: $SQNS $SIMO $NVDA $BSFT $TLEO $CRUS

330 liquid stocks reached 20-day high at some point today: $ARMH $CMI $URI $BMC…

Look, things can change in a blink of an eye. Chasing stocks that are up 3 days in a row is not wise. Taking gains relatively quickly and keeping your overnight exposure light still makes a lot of sense.

Where is the Strength

Over the past month, it has become a tradition for the stock market to rally at the beginning of the week and give back the gains at the end. Elevated volatility and 1% opening gaps have become a common occurance. This type of market environment has conditioned most of us to take profits quickly and limit overnight exposure to a minimum. This is natural. No one wants to wake up leveraged to a 3% gap in the opposing than the desired direction and the current headlines driven market is absolutely capable of everything.

Macro-wise, nothing has changed. Greece is still bankrupt, just like it was last year at the same time.  The difference is that now capital markets care. Why now? Maybe it has something to do with a cyclical global slowdown in the face of  overleveraged governments in the Western hemisphere and an increasing inflation in the emerging market world. No one knows for sure.

Let leave the macro analysis to the economists, and take a look at the price action. Two weeks ago, I mentioned that September won’t be like Correlation 1.0 August. It would be a market of stocks and so far I’ve been proven right. If your watchlist consisted of stocks like $ATHN $MAKO $STAA $VRUS $ULTA $PANL $WPRT $QSII… you wouldn’t even know that the market averages are in trouble. Focus on what you can control – the stock you trade, your entries, your exits and your position sizing.

Now is certainly not the time to be aggressive and to chase, but if you are looking to initiate some new long positions, the following suggestions could be a good starting point:

What Are the Bond Markets Telling Us

According to Bloomberg, the yield on the 1-year Greek Government Bond is 97%. With other words, the market has already priced a default, at least partial.

The fear here is that even partial default could spook investors, raise interest rates on other European nations’ sovereign debt, which might escalate to more defaults and results in under-capitalization of some of the banks that lent money. Also the worst case scenario – freezing of the credit markets.

Given the price action over the past month, you could make the case the the market has already discounted some of the scenarios mentioned above. The truth is that you can never fully discount panic; therefore we need to be ready for anything. (if this is even possible)

The negative correlation between equities and safety assets ($TLT and $GLD) continues to be very high – something typical for market downtrends. With that in mind, there is an increasing number of long setups.

Today, more than a quarter of the liquid stocks went up 5% or more. The number of stocks near their 52 week high has been gradually increasing. Even in August, when the market averages slumped to the tune of 6% or more, there were a few stocks that appreciated 20-30%. With one leg out the door, I am willing to give a shot to some of the long setups I mentioned on my StockTwits page. I don’t have any illusions in regards to knowing where the market will go over the next few weeks. If I am proven wrong, I will be stopped out. I am well aware of the dangers of confirmation bias. If you are looking long enough for long setups, you will find them in any market.

Keep in mind that managing risk does not only involve using stops and proper position sizing, but also timing your exposure to the market. Now it is certainly not the time to go all in and be overly agressive.