January 25th, 2011

Two Views of the Same Image

The StockTwits 50 blog articulated my feelings perfectly concerning last week’s truly painful couple of days for most tech stocks:

“For the week, the equal weighted St50 index declined by 6.2% vastly underperforming the S&P 500 and the Nasdaq Composite……there is no technical evidence that their move is over, we have to be blind not to pay attention to the high-volume sell off last week……Underneath the surface, small caps were ditched, trends in individual names were broken…..Investing/trading is not easy and it has never been. There is no approach that has a 100% success rate…..Knowing when to be aggressive and when to step aside and wait for healthier market conditions to present themselves is as important as proper equity selection and risk management.”

Then today, this same blog included a schematic familiar to readers here: the stock market’s emotional life cycle (click on image to enlarge this one attributed to Raymond James Research):

Their comments today about the chart were (my emphasis added):

“The first two weeks of the year were exceptionally strong for the St50, as in both occasions the index had more than ten stocks gaining more than 8% for the week and no losers…..We could certainly define this period as euphoria. Then the third week came and with it – the selloff. Last week, all 50 stocks in the St50 were under water; many experiencing high volume 8% declines. This brings us to the Anxiety stage – a period, which will decide which of the old market leaders will hold their trend, build a new base and eventually continue higher.”

I last included the same schematic on December 2, 2010 in “Launch of Optimism“. My version, however, begins with Depression proceeds through Euphoria ends at Despondency and looks like this:

The market closed that day at 1221 when I reiterated my feeling that a near-term target of 1320 before the “Sell-in-May” escape:

“You’re beginning to hear more and more of the ‘Talking Heads’ begin to focus on the fact that ‘things are improving’ than those saying that say ‘we have a long way to go.’…If investor psychology in August could be described as moving into Relief, then today I see the market nearing the end of a period of Relief and beginning to move into Optimism and clears the way for an extended move higher.”

While the tech stocks StockTwits 50 was referring to may have been in a state of euphoria, I don’t believe you could say that about the market as a whole. The market just cleared its 15-month trading range and there’s nothing yet to indicate that owning most stocks have produced in investors feelings of excitement, thrill or euphoria. Many investors with portfolios broader than tech have become merely more optimistic.

We may have more Anxiety right now about semiconductor stocks but we feel optimistic about many stocks in other Industry Groups. My Watchlist, the one I share with subscribers, has close to 300 stocks with charts were prices are about ready to cross above key resistance levels …. and I could add another 200. That’s a clear sign that, given a strong market environment, these stocks are ready for significant moves similar to the tech stocks Stocktwits 50 is now concerned about.

That’s not the end of the market, it’s what “stock rotation” is all about.

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  • Anonymous

    Wheat looks strong , what is the best play for this?

    http://finviz.com/futures_charts.ashx?t=ZW&p=w1

  • Joe

    According to ETFTrends.com:
    "There is no wheat-focused ETF in existence right now, but there are other ways to get exposure to this commodity, including these ETFs:
    * PowerShares DB Agriculture Fund (NYSEArca: DBA): Holds 6.3% wheat, 12.5% corn, 12.5% soybeans, 12.5% sugar and more.
    * PowerShares DB Agriculture Long ETN (NYSEArca: AGF): Tracks an index of corn, wheat, soybean and sugar futures.
    * iPath DJ AIG Grains Total Return Sub-Index ETN (NYSEArca: JJG): Tracks a basket of corn, wheat and soybean futures.
    * ELEMENTS MLCX Grains Index Total Return ETN (NYSEArca: GRU): Tracks futures contracts on soybeans, soy meal, wheat and corn.

  • zentrader

    I believe now is where stock picking will help the most. Friday's large black candle sure is scary tho…

    jeff
    (zentrader)

  • absarforex

    good information on this blog.nice job

  • Anonymous

    wouldnt the fact that this January was the best monthly gains since 1997 = euphoria?? also, do you ever talk about the reality that the FED has kept this markets propped up since QE1?

  • Joe

    Can't and wouldn't dispute the supportive impact of QEII but that's an explanation (perhaps even a causal one at that) but we're not interested.

    Since no one could have predicted the impact when it was launched and no one can predict when it will end and the effect of its end why even factor that into decisions today?

    If you thought that market prices are fictitious because of QEII then you would have missed a 30% move up since Sept 1.

  • Anonymous

    debt does not just go away. it amazes me how many investors have developed a false sense of security about these things. Perception = reality, at least thats what the administration is hoping for. With QE1 & 2 the markets were not allowed to go down. Its outright manipulation and we all know about it, so yeah anyone who paid attention would understand this. Thats why you have the large majority of talking heads bullish. The dollar is getting destroyed on the back of QE, but no one cares here yet because stocks are higher. The rest of the world is starting to really feel the inflation. It will come to the US sooner or later. Dont be caught with your pants down of get lulled to sleep by this FED manipulated market. It cant last forever. Debt does not create wealth.

  • Bob

    This is a very sad day, watching what happened to the Dollar, down $1.14 on the day and now VERY close to breaking the trendline of support, which opens the doors for a major sell-off in the Dollar. $70.70 IS the all-time low in the Dollar, and if Ben gets his way, we will soon be living in Hyper-inflation. Although the Equities markets would explode to the upside in a 3 of 3 up scenario, life for the average American will become a living Hell, if you have a job, your raises, if any, will not keep up with inflation, and if you are on a fixed income, as the unemployed and our retirees are, then you will be royally screwed as food and energy prices sky-rocket. I would rather go through the experience of a P3 down, and get it over with, so we can build a solid foundation in our economy for sustainable future growth, rather then living thru Hyper-Inflation, because this does not correct any of the long-term problems and the poor really get the short-end of the stick.

  • Jesse

    Joe, when reputable traders like yourself are saying that the FED manipulation is a non-factor, that just make me want to stop trading all together. Seems the world is punch drunk with there heads buried in the sand pretending that the debt problem does not exist…sigh

  • Joe

    Jesse, good to hear from you again. You misunderstood what I wrote. I didn't say that the FED was a "non-factor", I said they were a significant factor and as traders we have to play the consequences of their significant role.

    It's just like the conversation that just took place on CNBC by that megalomaniac Simon Hobbs and a commodity trader guest: the trader said in order to protect yourself you have to play the consequences of such natural disasters like the floods in Australia; Hobbs said that was immoral.

    I see the FED's actions the same way. What say you?

  • Jesse

    I guess I misunderstood what you meant when you said "Since no one could have predicted the impact when it was launched and no one can predict when it will end and the effect of its end why even factor that into decisions today?"
    I said non-factor. you said why factor it in. I think that the only way to make money in this market is to be in Ben's head. And things are great right now, but neither you or I know when he pulls the rug out…and no I don't like a manipulated market. I believe in free markets personally because in the end this is just another bubble that could have been avoided if the FED weren't playing God. It's a never ending cycle and with the devaluation of the dollar we are starting to get into territory were we could lose our status as world reserve currency.

  • Jesse

    Its just part of my DNA to expose the truth. The annual benchmark revisions that come out each January were released today, and (as usual) the jobs created in 2010 were overstated by 378,000. Your government is in the business of lying to you. I know you dont like to talk about facts but someone must…lol

  • Joe

    Jesse, translate for me how this new truth will impact your investment decisions today, tomorrow or the next several weeks. As a result of this information will you: sell what you own? buy more precious metals and commodities? sell more government bonds short? convert more $US into foreign currencies?

    Educate me: how do you convert this information into actionable knowledge?

  • Jesse

    the truth is that the markets move based on data, real or perceived. I's hard for me to buy into the manipulated market when I don't know all the rules of the game and when we have a FED that seems willing to devalue the dollar more. Will we have a QE3? nobody knows…I'd continue to bet against the dollar in whatever way you like. Eventually you cant hide the truth. The FED is playing dangerous games with the markets. If you think you have the FED figured out, then by all means stay long the market. I dont honestly believe that charting works accurately in a manipulated market.

  • Jesse

    sorry I upset the applecart Joe…this is why I stopped commenting. Ive just got to learn to ignore the facts more.

  • Joe

    Jesse, your point of view is always welcomed here even if I don't often agree with it. My responding is less for the sake of being argumentative than it is to have you see the same reality from a different point of view.

    Everything you've been saying about the FED for the past 18 months is true but, at the same time, the market has been up close to 40%. Does this mean that the market is vulnerable?

    Perhaps but I think I will know this in time enough to get out of the way so I don't lose all of the 60% I've made as the market has moved higher during this cheap money bubble.

  • Jesse

    well, I hope so because the PPT apparently has a fat finger guy working for them and we all know things usually go down much faster than they go up. I simply do not agree that the run up in the markets is based on reality. Businesses are figuring out how to stay profitable but through layoffs and inventory reductions ect. Is the economy this January the best January since 1997??? if you can say yes with a straight face, I'll give you a cookie lol

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