January 25th, 2011
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.