The markets opened higher this morning, no doubt due to retail investors placing overnight orders given yesterday’s big gains. But within minutes the market gave back much of that upside as cynical institutional investors used the strength to sell more shares. The question is, who’s right, the amateurs or the pros? Conventional wisdom says the pros are far more savvy traders, but the reality is much different when you look critically at the pros performance. The hard truth is pros are helpless victims to the market’s swings just like the rest of us.
I want to correct something I stated the other day when I said I was encouraged by the prospects of the next follow-through-day (FTD). What I really should have said is I am encouraged by the prospects of the next bounce. This week’s rebound took a lot of gas out of the tank and it will be a few more days before the market has the strength to stage another big up-day that will qualify as a FTD. By that point the market will have rallied a bit more and the actual FTD will happen at least 2/3 of the way through this move, meaning anyone who buys the FTD will be late to the party and most likely watch the markets rollover not long after. As I stated in previous posts, I expect the market will run into resistance near the 50dma and we are over halfway there. And to be honest, the market might not have enough left in tank to stage a 1.4% up day on higher volume before it runs into resistance, making all of the above FTD discussion moot.
As for how I am trading this market, I went long index ETFs on Tuesday. The reason I chose indexes instead of top-rated growth stocks is this market is far too choppy to speculate in high-flying names that can crash 10-50% overnight. The indexes are a far more stable and predictable in this environment. This also lets me take larger positions than I would feel comfortable with in any individual stock. Swing-trading the indexes is not a CAN SLIM technique, but it gives me something to do while I wait for a good bull-rally to trade, which could months away. In addition, I find having multiple techniques in my toolbox gives me the flexibility to adapt my trading style to the market we are in. A hammer is a great tool, but you’ll get yourself in trouble if you try to use a hammer on everything.
LULU dropped the ball with its latest earnings release and is down 10%. The stock had a monster run, up 2,700% since the ’09 lows, but every good thing must eventually come to an end. Is LULU’s time up? The interesting thing is LULU beat on earnings and revenue, yet it is still getting pounded today. What gives? Most likely it is concern over declining margins. Obviously investors in high P/E stocks hate to see that. Was this just a blip, or signs of saturation, competition, and pricing pressure? Time will tell, but given LULU’s impressive run, there is a lot of air under the stock.
FB is finding a little support, but there is a lot of fear remaining over the end of its lockup and the impending wave of selling by insiders. But if everyone is already talking about it, wouldn’t it already be priced in? I wonder if the stock will actually rally after the lockup expires? There is way too much bearishness in this widely hated and ridiculed name and that will inevitably lead to a bounce. But there is no need to catch a falling knife based on speculation and prediction. Wait for the bounce and then hang on for a nice pop. But don’t get greedy and take your profits early.
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 earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing 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.