Stocks traded higher in the premarket, opened flat, rose early on and then retreated back to the opening levels. The indecision is a symptom of the political uncertainty as we are moving back into a headline fearing market. The thing to be wary of is one bad headline can do far more damage than an equally positive story will move the markets to the upside, presenting a fairly skewed risk/reward. Further, it is almost comical to hear pundits talk about how oversold the market has become after a ~6% pullback. Maybe I’m missing something here, but it takes a raging bull to label a 6% pullback oversold. The interesting thing is many experts were calling for a 3-5% pullback in the markets to refresh the recent rally. But most often the expected outcome is the least likely to occur. So if we discount a 3-5% pullback, that leaves us with more than or less than 3-5%. Since we’ve already sold off more than 3-5%, that eliminates less, so it looks like we are facing more. Will it be 7-10% or 10-15%? Who knows and only time will tell. As I shared earlier, I would prefer to see us refresh by dropping to the 200dma before bouncing to finish the year higher because as a directional trader, I make all my money when the market is moving and the sideways chop is simply frustrating. So here is to hoping some Euro headlines spook the market into a panicked sell-off and after the dust settles, the market comes to its senses and rallies strongly, giving us the opportunity to buy discounted shares for a quick profit.
Seems FRAN has gone the way of INVN and turned into a wild speculating stock more suited to gambling than disciplined investing. But breakdowns in leading names are not uncommon in corrections and what really matters is how they respond after the broad market pressure lifts. Will these stocks remain broken, or will they form the right side of a base and present good entry points? That is what will separate the wheat from the chaff. There is no way to know ahead of time and we simply need to wait for the leaders to re-exert themselves and rise to the top before we pick stocks to buy in. Bottom picking is a riskly game and is why disciplined investors don’t play it.
LNKD is one of the few leading stocks still holding up in this correction, but it will be interesting to see how it trades once it’s big brother goes public this Friday. Will LNKD ride on the coattails of FB, or will it be cannibalized as a source of funds as it competes directly for the same pool of investors? And what happens if FB sells-off and forms a base after the hugely hyped-up IPO frenzy dies off? I’m actually constructive on LNKD and expect it will continue to do well even in the shadow of its much bigger brother, but there is no grantee and is why we still follow our rules no matter how much potential we see in a stock.
And a follow up to my Greece/Euro posts, just because it doesn’t make sense for Greece exit the Euro doesn’t mean it won’t happen. Politicians and common sense mix like oil and water, so anything could happen if politicians bow to populist pressure from the ignorant masses. But we need to be extremely cautious if we see Greece and the EU making moves to remove Greece from the Euro, knowing this will be the start of the mess, not the end. With an overnight devaluation of the Drachma in the range of 60%-70%, it will renew solvency issues for banks in the region and fan fears of more widespread contagion. No matter what happens, we’ll get through it, but the near-term volatility will make it a rough time to be long equities. The silver lining is the Drachma will make it super cheap to sail the Greek Isles.