Morning Market Thoughts
Good morning. I’m struggling with the flu that seems to be a lot like Santa Clause. If you’re just patient enough, he’ll ultimately climb down your chimney and leave you a present. Frankly, I’d rather he left me a lump of coal. But instead, I got the popular flu bug that everyone has been re-gifting.The futures are up sharply this morning which, after yesterday’s widespread selloff, shouldn’t be suprising. This is still a “buy the dip” market, and old habits die hard. And after all, why should you change a habit that has worked for years? So we can expect such pin action to continue — market sells off, buyers appear the next morning….lather, rinse, repeat.
But don’t discount what happened yesterday. The entire day creates what I call a “shot across the bow.” A SATB is typically seen in an untrending stock that has been under institutional accumulation. It is trending nicely — very orderly. At some point, it starts to get a bit more volatile, and volume picks up a bit. But the trend is intact, so there’s nothing to worry about, right? And then things change. One day the stock opens up a bit higher, and then massive selling takes the stock down in a very long candle…and the close is right at, or near, the bottom.. You assess the carnage at the end of the day and can see that this type of selling could only be institutional selling. So you watch carefully, and sure enough, the stock rallies. It may rally significantly, on higher than average volume (though not as high as yesterday). Whew, the coast is clear. Must have been a fat finger. The stock is back above key support (and perhaps the 50-day moving average). Back in the channel. Well, maybe I’ll buy some more.
The stock continues trending higher, though the volatility is up just a bit. Time goes by — maybe a week, maybe a month. But ultimately, the stock starts rolling over and starts accelerating to the downside. Reversal complete.
That big selloff wasn’t a “one off”. It was the first obvious sign that institutions were liquidating. They’d probably been liquidating for a while as the stock trended higher. Sell a little –> Back off and let the stock rise –> sell a little more –> back off and let the stock rise. But each rally was a bit more tepid than the last. Trend intact, but not orderly. At some point, the big trade is made and we see the SATB.
But we really don’t recognize the SIGNIFICANCE of the SATB until much later, and after the stock has reversed.
So, with respect to yesterday, I’m considering the broad selloff as a shot across the bow. All is not well. So even if the market continues higher–and it probably will because that’s what it’s been doing–it would be prudent to keep your enthusiasm in check. Remove your ego from any trade, and instead focus on what the stock is doing. Focus on your exposure. You want to stay involved in a strong market because that’s how you make money. But you KEEP money by avoiding being a fan, and instead focusing on exactly what the market is doing. If you look deep enough, think more than you’re used to thinking, and become more of a number cruncher than a cheerleader, you’ll find that you’ll keep a lot of your gains WHEN and IF the market does indeed roll over.
We aren’t there yet. But with each new All Time High, we’re getting closer. We have smooth sailing ahead. But don’t forget that missile that was just launched across your bow. That rogue battleship is out there somewhere…we just don’t see him.
Don’t forget about the Q&A training session tonight. You’ll be getting an email later today with details.
–Dan
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