Category: Uncategorized

“It is the anticipation of growth rather than the growth itself that leads to great profits in growth stocks. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality.” – Nicolas Darvas

The year is still young, but there are already more than a dozen of relatively liquid stocks that have appreciated more than 100% YTD:

– 6 biotechs: $AGEN $BCRX $REGN $OMEN $THLD $VVUS;
– 2 semiconductors: $IMOS $INVN;
– 1 medical practitioner: $LCAV;
– 2 department stores: $SHLD $BONT;
– 1 computer peripherals company: $KTCC
– 2 Internet services companies: $TUDO $BVSN

The odds are that most of these stocks will mean-revert by the end of the year, but a few of them could become the best performers. The philosophy is simple. Before a stock reaches 400% gain YTD, it will double first. Under the surface, the catalyst behind the move is always the same – expectations for future earnings.

History rarely repeats, but it often rhymes. The truth to the matter is that it is always different and it is never different. The hot investing themes and stocks change, but investors’ psychology and the charts of the best performers often look similar.

High correlation is back. Today 96% of the S & P 500 stocks lost ground. Usually such high correlation correction assumes more immediate weakness ahead, so be careful blindly buying dips.

I am still under the assumption that this is a pullback within the realms of an existing uptrend and eventually it will turn out to be a buying opportunity. Below I list 4 ways to deal with the pullback. Which ones you are going to apply depends on your time frame of operation and risk affinity:

1) Watch for strength to give you a hint on potential future leaders. Stocks rising in a weak tape are usually under heavy accumulation for a long-term reason. Some examples from today: $PAY $SHFL

2) Pay attention to sector rotation and look to nibble stocks with high long-term relative strength, but short-term relative weakness – or in other words, stocks that have corrected over the past 2 weeks or so and are finally finding some buying interest. For example: semiconductors ($NANO $KLAC) and precious metals ($SLW $NGD) – for a mean-reversion, short-term trade.

3) I assume that you already have a wish list of stocks that you want to own on a pullback and did not want to chase. Market corrections are long-term investors’ best friends as they offer great brands on sale. My wish list includes: $COP $CMG $NKE $DDD.

4) Stay heavy in cash and wait for new long setups to show up and market averages to resume their upward trend, before you allocate more money on the long side. Good setups are like taxis. There is always another one just around the corner.

1. Small Caps ($IWM) have been severely underperforming over the past 3 weeks, essentially reflecting a new stage in the current uptrend – the so called flight to quality. This is not necessarily a bad sign, but a clear indication of decreasing risk appetite, which tends to feed on itself.

2. The major indexes ($SPY, $QQQ) had 3 distribution days in the past 13 days, which is certainly a reason for caution, but not for turning outright bearish yet.Tops in market averages are a process, not an event. Price/volume action gives enough clues before any major damage is caused.

3. There is a decent number of long setups that look like a Picasso – prior uptrend, followed by 5-20 days of tightening sideways price consolidation near major highs and yet very few of them actually break out. Those that do, are short-lived and quickly fade. Buyers don’t have the conviction to step in and push higher.

There are no reasons to turn outright bearish here. It seems that institutions are waiting for a pullback before allocating more capital. I assume that dips in high-growing names will be welcomed as buying opportunities, but in the meantime I raised cash this morning and pulled out of positions that haven’t performed according my expectations.