Morning Market Thoughts
Good morning. The futures are up a bit this morning, with the Dow Jones Industrial Average set to open up 63 points the S&P up 6.5 points, and the Nasdaq Composite up 21.50. As I’ve recently mentioned, the rebound in stocks after last week’s big selloff should be viewed with skepticism. After a big selloff that results in a large cash position, it can be tempting to start plowing it back into the market when the selling abates. Sometimes that’s the thing to do — and sometimes it’s not. I think you’ve just got to be very stock-specific and keep the number of stocks you are holding limited to a reasonable amount that allows for easy management. If a stock is working, then stick with it and even add to your position. Remember, the ultimate goal of a trader is to get alpha. Alpha is outperformance.The retail sector is up this morning after several retailers reported earnings that weren’t terrible. Keep an eye on Abercrombie & Fitch ($ANF) and Dollar Tree ($DLTR). Both are trading much higher this morning. They may present shorting opportunities. It is always a big risk to buy stocks that are gapping up more than, say 5%. Typically, they will correct as professional traders lift their offers and force buyers to pay higher prices. Then, once the market opens, they sell as much stock as anyone wants to buy because they know that the demand will ultimately wane and prices will fall. They can then cover their shorts for a nice profit.
But while this is a typical scenario, it’s not a cinch. Sometimes those gaps turn out to be the start of a big move. Demand is stronger than sellers thought. They have to rush to cover their shorts, which pushes the stock even higher.
Happily, you don’t have to place a bet on the direction. You can wait to see whether the opening print will hold up or break down. It’s quite an advantage. Think about it this way: Wouldn’t it be nice to be able to bet on the Mayweather v. McGregor fight after the first round? Vegas doesn’t let you do that; the market does.
So if you’re an active trader, then wait until after the first round. Also, check out the pre-market trading behavior where $ANF is actually trading down 66 cents from its reaction high, while $DLTR continues to trend higher.
See you in the forum.
–DAN
Market Update