Morning Market Thoughts
Yet another flat open, with a slight bias to the upside. All of this sideways flotation will be challenged this week, as Apple (AAPL), Facebook (FB) and Amazon (AMZN) report earnings tomorrow, Wednesday and Thursday, consecutively.Yesterday I was looking at a lot of charts, scouring the market for opportunities for action NOW. I saw a lot of charts that looked virtually the same — in uptrends, but so extended that buying was ill-advised, but that selling stood the possibility of getting out of the trade too early. This is the stuff of “melt up” markets that everyone hates. They love making money, but they are also filled with the sense that the other shoe (and their stocks) will drop at any moment. So they stay very close to the exit with their hand on the door knob. Sound familiar.
So I started thinking about bottoms. They come in all shapes and sizes.
Here are my thoughts:
One of the temptations for many traders is the desire to buy right at the bottom. A stock (or the entire equities market) is trending lower. You watch and wait for the precise low, and then pile in. But the only time this tends to work is when the downward trend isn’t truly a “trend”; it is more like a rock falling off a cliff. The fall is so sudden and steep that capitulation is inevitable – and it will be obvious. The S&P fell like a rock last August, as well as in January. And most recently, after the Brexit vote (which turned out to be a temper tantrum by globalists…and nothing more). The selling was so aggressive that supply violently overwhelmed all demand.
In such instances, it pays to step back and think about how individual behavior combines to create a massive crowd dynamic.
Once you’ve sold, you’re done. You can no longer impact the movement of a stock. You are a bystander. You can be happy to see the stock falling further, thereby vindicating your decision to sell. But your happiness doesn’t influence the price movement one bit. You’d need to actually reverse your action and buy the stock. And few people actually do that. Most sell, and then they wait – they are bystanders. So the group of bystanders grows quickly when stocks fall steeply. And the steeper the fall, the more aggressive the selling. Selling begets more selling, until the last panicked seller has joined the crowd of bystanders.
I discuss this dynamic in Technical Analysis for Non-Technicians and refer to it as the “Power Cycle”.
You can see this “capitulation selloff” on many charts. And it’s actually fairly easy to know when to step in – just wait for the first “green” day, the quick flip of a few short-term indicators, and you can buy with a defined risk profile.
But there are few of those trades in today’s market. The melt up nature of equities will ultimately end badly, but we don’t know exactly when that will be. When the uptrend is justified by calling it “TINA” (there is no alternative), do you think that’s a good thing? It is fine to recognize that equities are moving higher due to a lack of alternatives, but that should make you more cautious rather than emboldened.
Since we can’t find any real capitulation selloffs to capitalize on right now, let’s look at a different type of bottom — a base that’s starting to transition into an uptrend. The Cybersecurity sector is showing such bases. Check out daily charts of these stocks:
CyberSecurity ETF (HACK)
Fortinet (FTNT)
Cyber Software (CYBR)
Infoblox (BLOX)
You’ll see that their bottoms are behind them. (Sorry, I couldn’t help myself. The joke was there, and I took it). I’ll cover these in tonight’s Strategy Session.
One news tidbit is the Verizon/Yahoo! deal. Verizon (VZ) finally pulled the trigger and is buying Yahoo! (YH00) for $4.8 billion. It’s too early to say which way the gun is pointed, though. Yahoo has a lot of problems (seen their Finance page lately?…or all the comments from users? Yahoo made a boo boo.) Verizon is up slightly, and Yahoo is down slightly, indicating that there is not too much emotion about this deal either way.
Have a good day, and I’ll see you in the forums.
–Dan
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