Weekend Review 01/11/13

A characteristic of the market since last June has been an overall lack of a linear uptrend which made swing trading momentum stocks challenging. Through August the moves on the SP were swift, often 3-5% over a couple of days followed immediately by retraces of 2-3% over the next few. If one was not positioned beforehand it became difficult to stay in a position since the break outs that occurred during these few days had little support from the general market over the next ensuing and hence little to no follow through. A related issue to this type of price action was that by the time there was a more suitable and advantageous period to swing trade momentum, market breadth was extended.

With market breadth extended there was a tertiary issue this created, a lack of set-ups. The herky jerky moves of the general market made for volatile price action on daily charts, as many had erratic price action before break outs or were already extended from logical swing zones by the time market volatility had settled down and daily ranges contracted.

Currently the market is in a similar situation of stretched breadth after the 2.82% gain on the SP during the holiday shortened week following the fiscal cliff resolution. Additionally indexes like the NASDAQ are seeing moves on over night gaps which isn't necessarily translating to the underlying stocks moving, and if they are there is the issue of them being faded. Also, by nearly every publicly available breadth scan the market is extended here and the lack of follow through on momentum stocks is becoming reminiscent of the June through August period where if you're not anticipating the break outs and taking advantage with early entries, holding positions as price action pressures stops makes trading a little discomforting right now.

While there are similarities there are also the distinct differences. The first is the there were a plethora of set ups available through December to take advantage of. The problem, however, was the general market risk attributed to inability of a number of yahoos to play nice. Politicians are an X-Factor that can make or break markets with their policies and decisions so while the market was by all means looking attractive, there was a scab that was either going to be ripped off or left to heal. This was added risk that made it prudent to either avoid holdings through the new year, or in the least be very light.

There's another key difference that I've noted this week as well, the $BPCOMPQ. Extended markets can correct through time, pullback, rotation, or a combination of the three. This past week the SP has moved sideways with a modest .64% increase over last week. What this suggest to me is that the market is currently undergoing a correction over time which is healthy. Further I'm anticipating that there is still legs to this market and that due to the lag of the NASDAQ, there will be rotation into tech. A quick look at the charts of the $BPNYA, $BPSPX, and $BPCOMPQ shows that while the first two are over 70 and extended, the later clearly has some more upside.

$BPNYA

$BPSPX

$BPCOMPQ

In conjunction, there is a risk-on environment occurring right now as evident by the Russell reaching an all time high and a number of recent IPOs that continue to make new highs on a weekly basis as well. The SP mid-cap MDY has also made it to an all time high and the SP is closing in too. While all these are positives, they've also coincided with a new in pouring of retail capital which warrants caution because exuberance by the general public is often a contrarian indicator. It remains to be seen whether this will continue to buoy the market or signal a looming correction, but in either case market reaction will yield clues.

This continues to be a bullish market and there are plenty of opportunities and set ups emerging which is ultimately what matters.  I've already managed to get fully invested over the past two weeks and see no point in trying to chase the market here.  Either my positions will work or they won't and in either case I'll be looking to move capital into new set-ups should targets be hit or stopped out.