A Stock Picker’s Market
We’re not huge fans of market aphorisms, but this truly is a stock pickers market. Last week we highlighted some sector rotations created by the moves in yields, but these were brief opportunities and we continued to view Technology (XLK) as one of our favorite sectors.
In truth, Tech is actually the only sector which is showing real and consistent strength. Last week XLK made a new all time closing high and our go-to market leaders such as Apple (AAPL), Amazon (AMZN), and Netflix (NFLX) also closed at new all time highs. If you view the market through this narrow group of mega cap stocks, all is rosy. But look around and you’ll see the Dow Jones (DJIA) is 8% below its 2018 high, Financials (XLF) over 10% below the highs, and many stocks struggling to build rallies.
This isn’t exactly a case of bad breadth, as the NYAD (total stock advances minus total declines) is making new highs.
But as you may expect, there are not many stocks making clean break-outs and trending at 52-week highs.
There are some important takeaways from this.
The first was addressed in more detail in our main weekend newsletter several weeks ago. This highlighted how certain stocks and sectors such as Consumer Staples (XLP) have already topped and are making their first trend sequences down, much like certain defensive stocks did in 1987, even while momentum stocks continued to rally. We can now add certain stocks from the Financials sector (XLF) to that list, especially Goldman Sachs (GS).
GS should recover before its next leg down, but the risk is it makes a much slower rally and forms more of a bear flag. This leads us on to our second point.
Stocks are at best a 3-month hold, and most are best traded from a short term perspective. Many weaker stocks will fail to make new highs and are likely to make stuttering rallies which will frustrate as gains are given back repeatedly. This is illustrated by Utilities (XLU), which despite completing a trend sequence lower, has failed to recover.
This tells us looking for shorts may not be such a bad idea after all. While we still expect a mini-blow out to new highs in US indices, many stocks may not participate and any correctional rallies are a chance to sell.
So choose your stocks carefully. Tech may be one of the most crowded trades around, but still provides the best buying opportunities particularly if NASDAQ continues to follow our 2014 Calendar template.
It is only when Tech and NDX are ready to turn that all the apples (or pears) will be ready to fall.
Good luck and good trading.
Chief Stocks Analyst
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