The markets bounced around modestly all morning and are currently lower with no new headlines to push the markets decisively one way or the other. For the time being the correction found footing around 1300 as the selling pressure moderated and value buyers are finding these levels attractive.
Today is the first day that could qualify as a follow through day from Monday’s rally attempt. The thing to be careful of is while there are such things as V-bottoms, they are typically associated with frantic sell-offs that are emotionally charged and lack fundamental merit, thus the extreme plunge followed by a quick rebound. Further these are most often found in individual stocks, not the indexes. Based on history, if we do get a FTD in the next few days, it is unlikely the market will take-off and resume the previous uptrend, if for no other reason than we have a fair bit of overhead resistance from regretful buyers over the last three months who are praying for the chance to get out at breakeven. So while this pullback is constructive in the big picture, leave the raging-bull hat in the closet for the time being.
As for headlines, it seems like we are stuck in the movie Ground Hog Day as we continue seeing the same economic stories recycled from last year. We should start calling it the “olds” because there is nothing new about it. As it stands everything should already be priced in the market fairly well given we just reset for the Q1 Teflon rally that was completely oblivious to ominous headlines. Not to say we can’t dip a bit lower over the coming weeks and months through the market’s typical gyrations and head fakes, but it will take something genuinely new and unexpected to crash the market from here. Maybe this is Greece actually getting kicked out of the Euro instead of just idle speculation and debate. Or some kind of irrefutable proof that China has been manipulating their economic numbers and the situation is far more dire than we are lead to believe. But as long as we are simply fretting over a sluggish economy or a Greek default, that is already baked into the cake and accounted for.
In individual stocks, FFIV is getting crushed today and is 20% off of its 52-week high. This is just one of many recent examples of why every great investor preaches never fall in love with a stock. Date them and then take your money and run while the sun is still shining. The idea of home-run hitting is extremely seductive, who doesn’t want to hold a great stock through an entire 1,000% run? But while it is easy to identify the biggest winners at the end of each year, the thing we fail to consider is the hundreds of stocks that had the exact same fundamentals and chart patterns that crashed and burned. This phenomena is called survivor bias because we only study the successful and ignore similar examples that plunged into obscurity. In trading, the best way to hedge against this is to take your 20% profits and move on to the next hot trade.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.
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