Patience pays 2.0

Biotech stocks are kind of interesting heading into the holiday shortened week.  They also show why the market is so hard right now.  When the market is hard, you don't have to trade.

The group saw intraday buying Thursday and Friday.  The ETFs also failed to make new lows with the market on Friday.  That tells us there MAY be some risk appetite in the market.  

The problem here is the larger measured move suggests a move to the mid 40s.  Measured moves are never sure things, but this backdrop isn't what you want to see when looking for a sustainable market bottom.  

After such a swift down move, it's entirely possible the end of week action shows restraint by short sellers.  Many biotech stocks are at support after breaking down out of larger patterns.  Perhaps sellers are waiting for moving averages to catch up and provide better trend following short entries.

On top of that, throw in the fact the S&P 500 is at crucial yet very obvious support.

Although a near term long trade may work in some individual stocks, I would rather wait for a trade aligned with the current downtrend than force a long idea i'm not comfortable.  That said, a great short trade might not show up either.

The point is, it pays to be patient and to make a habit of taking only GREAT trade ideas.

Thanks for reading.  Trade 'em well!

Variant Perception

Market positives are hard to come by these days.  Well, at least that's the perception.  Howard Marks spoke to this in his latest memo: On the Couch

One of the most significant factors keeping investors from reaching appropriate conclusions is their tendency to assess the world with emotionalism rather than objectivity.  Their failings take two primary forms: selective perception and skewed interpretation

The bottom line is that investor psychology rarely gives equal weight to both favorable and unfavorable developments.  Likewise, investors' interpretation of events is usually biased by their emotional reaction to whatever is going on at the moment.  

My friend Frank Zorrilla (@ZorTrades) made a great point on Twitter Friday:

Here in the short term, strictly going to focus on what can go right..only works if you believe in up and down, not up or down

— Frank Zorrilla (@ZorTrades) January 15, 2016

Market breadth and sentiment is extreme enough that we need to think hard about the positives and potential positive developments moving forward.

It's also true that earnings season often sees swings in both directions as the news flow hits the tape.

One in 'our face positive' that deserves discussing is gasoline prices.  From Labor Day through Q4, gas prices were stable.  With the market meltdown, prices have dropped over 20% in just over two weeks.

Looking at the last 16 months of price action, there are a few interesting points to be made.  First, Q4 2014 saw Gas prices plummet 37% through year end, essentially crashing during the holiday season and continually providing a boon to holiday shoppers.  That boost was nowhere to be seen over the holidays.

Also note in Q1 2015, prices rallied all quarter.  Again, all of a sudden prices are 20% below where they were one year ago and 40% below where they were at the end of Q1 2015. 

This is all coming while retailers have maintained discounts beyond the holiday season.  It's a nice combination for the middle class consumer.

Keep this in mind as your favorite consumer discretionary companies report earnings.  A relative headwind from Q4 all of a sudden become a large tailwind for Q1.  Of course these numbers get modeled in and factored into corporate forecasts, but with all of the pessimism and negative news flow, they likely aren't priced in.

On a similar note, the ratio of consumer discretionary stocks to consumer staples stocks, coined as the consumer ratio, is testing a four year rising trend after a dramatic drop.  If this ratio is going to turn, it will very soon.  This coming while the market is sitting at major support.  

Thanks to Mark Newton for pointing this out on Friday.

At the start of the year I wrote 'What's up with retail'.  The breakdown setups were large and have significant technical implications.  I noted that one major concern was how retail struggled to make progress in 2015 even though energy prices were continually crushed.  That STILL is a concern as it may signal broader underlying issues with the consumer.

It'll be interesting to watch this measure of risk appetite as the market reacts to Q4 earnings.  The setup for some risk taking and an improving consumer discretionary group is present.  

Thanks for reading.  Trade 'em well!

Come on, America

Any rational republican's worst fear is coming true.    Trump is actually strengthening in the polls.  Most normal people are disgusted and can't even watch the joke that is Republican debates.  It's all working in Trump (and eventually Hilary's) favor.  

I don't get it.  Any jerkoff can be a loud, volatile asshole about everything.  

Oh you think he's a successful businessman? Again, any asshole with a 200M inheritance given the keys to a family empire could have made 5x their net worth in US commercial real estate over the last 35 years.

Chart via Scott Grannis

It's clear that many Americans want a drastic change away from Obama's policies (as they probably should).  They want change so bad, this foolish caricature sounds pretty damn good.  Trump's marketing team is genius, but he's definitely not the man for the job.

Come on America, we have to get our shit together!  

Shak Shaken

This market drubbing makes us miss the good ole days of yesteryear.  Remember when ShakeShak rallied from 40 to 90 in 3 months?  Well, last week the stock gave up that IPO level.   

Think about the other hyped 2013-2014 IPOs that have lost their IPO floors.  Twitter, Fitbit, GoPro etc.  They've been pummeled.  This isn't a handful of coincidences, it's a trend.  Use that knowledge to your advantage.

The supply-demand imbalance is epic.  This is a 15 dollar stock masquerading as a 30 something dollar stock.  Short rallies.

Disclosure: The author has no position in SHAK at the time of publication

What you 'know'

It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so. - Mark Twain

They say it's bullish when advance decline lines lead markets to new highs.  Well...that's not always the case.  At least not for the S&P 500 in the most recent fall rally.

Cleaning up some chart lists I came across this chart of the S&P 500 Advance-Decline line from November.

Clearly if you would've invested off that chart alone, you have been buried in 2016.  So what are the lessons here?

1. We know less than we think about markets
2. Each data point is just a piece of evidence within the market mosaic. 
3. There are always exceptions to the rules

Amazingly, this signal is not invalid as the market hasn't broken the fall lows, but you're year would still be wrecked within two trading weeks if you confidently waited on the market to make new highs.

Thanks for reading!  Trade 'em well!