Buy But Don’t Throw Caution To The Wind

Random Thoughts

Recently, I have been discussing the fact that volatility has compressed on a closing basis in the Ps (S&P). Traders don’t tend to agree for long. Usually, once a low volatility situation has been identified the market then makes a large move as volatility reverts to its mean. It looks like we might be seeing that unwind now. The Ps dipped but then recovered to close strong. For the day, they tacked on exactly 1/2%. And, this is enough to have them closing at all-time highs.

In the Quack (Nasdaq), there was a lot of excitement last week because it formed an outside day down at new highs, or in candle speak, a fat Sumo wrestler sitting on a baby. Anyway, as I wrote last week, sometimes a market just has one bad day. True, I’d feel better it were banging out new highs but so far, so good. It is now trading above the outside day down close. Again, sometimes one bad day is just that.

The Rusty (IWM) continues to bring up the rear. It was good to see it stabilize after testing one-week plus lows. For the day, it ended up 1/3%–better than a poke in the eye. It continues to claw its way higher in a 2-step forward, 1-step back manner.

With the Ps at new highs it’s no big surprise that some sectors such as Real Estate and Transports also made new highs. What’s impressive is that some areas such as Consumer Non-durables, Retail, Utilities, and others actually accelerated to new highs.

Metals & Mining ended slightly higher after probing multi-month lows. Overall, they still appear to be rolling over. However, both Aluminum and Steel & Iron is defying gravity here. They closed at new multi-year highs. I’m often asked, what’s more important, sector or sub-sector action. The answer is sub-sector action since, as you can see, sub-sector areas can often trade independently of the overall sector. Yes, ideally, you want both going in the same direction, but like Mick says, you can’t always get what you want.

The recent sell off has actually created some opportunities. I am still seeing setups in Aluminum, Health Services, IPOs, Gold & Silver, and the Energies. I’m holding off in the Gold & Silver stocks for now based on the poor performance of the sub-sectors overall. Again though, takes things one-day-at-a-time and check back often here.

So what do we do? Nothing has changed. Now that we are seeing new setups we are looking to add on the long side. This doesn’t mean throw caution to the wind and buy, buy, buy. Pick your spots carefully. Make sure you really like setup—the trend should be clean and strong. By “clean” I mean obvious. If the chart looks like an electrocardiogram then it is not in a trend. And, as usual, wait for an entry and then use a stop once triggered just in case.

Best of luck with your trading today!

Dave