Wednesday, March 12, 2014

It Ain't Working

These are the days of the "hook." Something happens to hook you into buying a stock. Maybe its a chart breakout. Or its a giant move sparked by great news. Maybe its a hot group that keeps on making amazing moves. Or perhaps its a once great group that has pulled back into what looks like the buying zone. Whatever the "hook" is, it is not working anymore.

The bulls will tell you that we are going through is a healthy market rotation that is working off the froth. The bears have had so much pain that they are afraid to sell short. So they will tell you that stocks may be experiencing short term sell offs.  Asset allocators will give you all kinds of reasons to rebalance your portfolio allocation by overweighing your assets into specific groups that will do well according to what the "play book" says to do at this point in the business cycle. Others will tell you to hide your money in the tried and true safety stocks like BRK which has had a decent but absurd run lately.

While the Major Indexes like the RUT are Struggling. Some words of wisdom from Joe Louis about hiding in BRK may suffice: "He can run, but he can't hide":

I think that the only people who are making money are the ones who are fast enough to play the intraday momentum both ways with precise day trading accuracy. Many of the one day wonders have made huge pre opening moves and big post open gap ups that are then faded. The news reports show stocks that have made tremendous percentage gains for the day. They fail to tell you about all the momentum swing traders who have been sucked into chasing these stocks only to suffer large intraday losses as the sharp day traders fade the pops. Here are some examples of the hook:

1- Leaders Appear To Be Starting The Next Leg Up Only To Rapidly Become Out Of Favor Former Leaders.

Solar Stocks

CSIQ Fake Out breakout. I bought, profited and got out as the break out failed. This is tough stuff. As is the case in today's market, I gave up much of my gains.

SCTY Ditto - another failed break out.



CELG The biotechs led the market in 2013 and leaders like BIIB, CELG  & GILD were safe bets. Now they are all stalling out. One day wonders or stocks with truly great FDA approved drugs may work out well, but to find those stocks before approval is a crap shot. You have to be very fast to buy them after the news and even then it may pay to wait awhile for a pull back.  

2- One or Two Day Wonders. Some of these stocks have made runs, consolidated and then exploded up. Others came out of nowhere. All made money for those who bought them after hours or pre opening on the news and then sold into the opening whoosh up. The momentum chasers who bought hem after the open got hurt.

CDTI Just look ho high CDTI went today before reversing down. Some sharpies shorted this puppy at the highs leaving the folks who chased the stock during regular trading hours with huge losses.

OPTT Same theme as CDTI. It does not pay to chase maniac stocks.

3- Crazy Hot Speculative Groups are fraught with danger. Take today's poster boys, the alternative energy fuel cell/ battery stocks. The maniac hot groups left many people holding the hot potato:

BLDP People got hurt really bad with this group today. Just look at that in your face engulfing pattern.

PLUG Great projected growth and earnings report - if you want to wait until next year before they may earn a dime. I like the TSLA battery factory and Walmart thing, but really?


4 -  Failed Breakouts To New Highs. Last year a break out was the reason to jump on board for the next leg up. Now it is the hook that traps new buyers as big money sellers use the breakouts to get out. Here are some examples:

BIDU China's leading internet stock keeps breaking out and failing.

EJ Great breakout and then a very fast failure. I luckily sold into the pre market gap up yesterday.

PXD Lagging the group with a late break out and eventual failure. I bought the break out but saw lots of my profits disappear before I sold.

SMCI Blow off, consolidation and failure

SPLK Blow off top

SSTK Another failed break out.

UIS They got you with the fake break out

5 - Failing Leaders Like The Banks Hit the Wall  

JPM Fails At Major Resistance. BAC broke out and made me some money, but I sold anyway. I don't trust it.

In sum, all the traders TA tricks are not doing the job. That tells me to be extra careful and trust nothing. Other than some opportunistic reactive day trades, in my view, it is time to stay in cash and do some reactionary day trading shorts. I don't know if this is a topping phase or another consolidation waiting for another "V" shaped surprise rally. All I know is that I am banging my head against the wall right now.

Despite what many people will tell you, technical analysis works in the right environment. Recognizing that this is not the right environment is the key to the preservation of capital. And recognizing that there are lots of very smart money managers out there who know how to orchestrate a chart break out or take advantage of a break out in order to sell into a buying frenzy is all part of the game.

The hardest part of this kind of market is that even when one plays small, one can still die of 1000 small cuts. And human nature is tugging at us to chase the hot stocks. Its time to resist the temptation because something is off here.

BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.
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