Correction Corrected?

2/12/18

- Overall Market -

U.S. stocks plummeted 5.2% last week, Strategists pinned the drop in part on the need for a healthy correction after the run-up of the past few months, and on rising bond yields, which ticked up on sign of impending inflation. The higher yields lured money out of equities.

Market bulls aren't throwing in the towel yet... Futures trading has shown strong bullish action since Sunday evening open. As of this morning e-mini futures have traded up to 2,650 level. This has been a reaction zone in previous sessions. 

Last weeks sell off was blamed on nearly anything you could throw a dart at. Many were screaming that volatility traders started the sell off with the inverse volatility trade that saw a 95% drop in a matter of hours. Others were blaming inflation and bond yields. Others screaming that the jobs number starteled the market. Even so far as to say the economy is "over heating".  In my very simple opinion, it is something far more straight forward than that.

Simply put the market has not has a real correction in 18 months, nothing more nothing less. Yes, there were contributing factors to this broad selling but things were simply way to expensive and forward pricing was upwards of 18 times earnings on some names, just far to much to pay.

From the technical side of this correction, it has been easy to see coming. Moving averages were extended, trend and strength indicators such as our previously mentioned RSI reading on the SPY over a whopping 87! volatility had diverted from price action; Something had to give.

In an age of algorithmic and high frequency trading it is easy for things to go up and down rapidly.  While Our pull back was fast and incredibly violent, it remained relatively orderly through most trading. 

- Looking Ahead -

Looking forward the question becomes, what does this mean for the market? I personally see this as a buying opportunity for long term positions and as previously stated have received phone calls from many financial professionals stating the same. The overall state of the economy appears strong, key metrics for growth and stability are also solid. 

As shorter time frame swing traders may have seen the end of the "easy money" bull market. Most likely we will now resume choppy trading from these levels. Proper technical analysis and stocks grounded in strong fundamentals will be key to success in an environment like this. I do not see it likely that we zoom back to all time highs in a few day. 

Be mindful that this correction can still technically go another 2%-4% however if volume is to be any indicator, it looks as though at least for the time being a swing low of this move has been established.

- Keeping a level head -

I receive many emails, messages and questions through social media and our students. Do not be discouraged if you personally are experiencing reduced performance or some mounted losses. The last two weeks have provided great opportunity in volatility trading and those who were bearish on commodities saw some incredible profits as both oil and natural gas saw heavy selling. For everyone else, it is likely you experienced some significant losses in unrealized profits or realized losses. Much wealth was destroyed in last weeks rout of the market. 

For those of you new to the market it is typical that once a year we see a correction of some type. Recently they have been very short lived lasting less than a week. Historically a pull back takes place over the course of 3 months. Your best chance to grow your wealth by leaps and bounds is buying while fear is high. In this case buying pull backs or eventually the end of the next bear market, which will eventually come to pass. 

While I rarely give financial advise, I will say this.. If you own long term investments in a 401k, IRA or other avenue for retirement. ALWAYS speak with a financial professional to get a better understanding of things. Yes, I know they are not traders but they are well versed in knowing how different markets, interest rates, global events interact and can provide insight into historical data that few retail traders even know exist.

- A higher interest rate environment  -

Understanding that rising interest rates is a coming reality, can help us look for some longer term vehicles to trade. As would be expected the financial sector tends to do well in a higher rate market. Financial sector components see margins expand as rates climb, financial entities such as banks, insurance companies, brokerage firms have historically benefited from higher interest rates.

A short list of bank stocks to consider that have historically benefited. 
Bank of America Corp. (BAC); JPMorgan Chase & Co. (JPM); Goldman Sachs Group Inc. (GS); Citigroup Inc. (C)

If you trade on a full service platform and utilize margin to trade, you can guess that money from your broker will become more expensive to borrow. Similar to banks, we have a chance to see some correlation. Some of the most well know brokers to consider

E*TRADE  Financial Corp. (ETFC); Charles Schwab Corp. (SCHW);  TD Ameritrade Holding Corp. (AMTD)

Insurance companies also see a high level of correlation to rising rates. This industry is large and includes some good and poor companies. Below is a list of some names I have traded in the past.  

(PGR) PROGRESSIVE CORP-OHIO; (ITIC) INVESTORS TITLE CO; (SNC) STATE NATIONAL COS INC; (ALL) ALLSTATE CORP

Make sure to do your own research for the above financial sector names, be mindful that as interest rates rising is good for these stocks, it is often times not great for the overall economy. There is a balance between good rates, good inflation and over inflation. In a situation where lending slows down, any financial institution can become a risk, regardless of interest rates. Think of 2007-2008 financial crisis as an example here. 

 

- Trading -

You will find that many large cap stocks have pulled back to 100 or 200 day moving averages. This is due to them broadly following the indexes. Be mindful that many technical indicators will be giving false signals for some time, potentially even the next few weeks. 

Focus for me will be on buying value. This means buying only stocks that were in a strong uptrend prior to last weeks sell off. Any stocks that have shown prior weakness have a potential to continue bearish, at some point price action will cause traders and computers alike to sell lower.

If you are risk adverse or do not trade well in high volatility environments, it may be prudent to avoid trading until the market suits your strategy. 

Keep in the front of your mind the ability for the market to change rapidly. If you are a trader this will mean locking profits and looking to renter, if you are an investor most likely nothing changes for you.

 

 - Market - 

As price action has caused many erratic changes, I will avoid technical notes on individual stocks. Many indicators will be giving false signals for quite some time. potentially even the next few weeks. Instead I will focus on sectors as a whole to identify potential value.

VIX (Volatility) Spiking to a high of 40 on the volatility index during fridays session. As buyers entered the market and volume appeared to find a bottom, this slowly eased off. We are now seeing this index at 26. I would like to see this down to 14-18 spot. Numbers this high are continuing to show some genuine fear in the market. Watch for this to come down into a more acceptable historic range.

XSD (S&P Semiconductor Select Industry Index) Sector trading under 200dEMA, a strong flush under this level seen last week. Two closes below this key level. Price must now retest from the lower side of the moving average. May be a bearish signal for the sector or at the least some weakness showing.

XLE (SPDR S&P energy)Sector trading well under the 200dEMA, Oil and natural gas both giving back recent gains and continue to show weakness. This is holding down most energy sector names. Historically energy does not fair well in a higher interest environment. We may see money start to flow out of this sector. 

XBI (SPDR S&P Biotech)Sector looks to retain its strength. Biotech has been strong since President Trump was elected. Price action never touched the 200dEMA and is trading well above. Resistance now looks to be the 50dEMA which is currently being tested from the low side. I will watch for strength to continue here should the market hold. 

XLF (Financial Select Sector SPDR Fund) Sector with great strength during the correction. This is to be anticipated as we have discussed the possibility of higher interest rates. I would look to see this sector experience positive inflow as traders and investors may attempt to position ahead of any coming rate hikes. 

XLV (Health Care SPDR ETF) Sector holding above 200dEMA but showing weakness as we closed once below and probed even lower during Fridays session. Price has recovered and closed above the 200dEMA which is a good sign. We must remain above the 200 day for any real strength here. 

BITCOIN/CRYPTO

 Be mindful that crypto prices are attempting to break a down channel we have traded in for the last month. If we breakout of that channel to the upside we may see some sympathy in former names $GROW, $TEUM, $SRAX, $RIOT, $MARA, $DPW, $XNET

 

Fire watchlist for market day 2/12/18

  • TWTR
  • AMD
  • NVDA
  • UVXY (long vol)/SVXY (short vol)
  • CTRV
  • DGAZ

Low Float/Small Cap momentum-

Give momentum some time in low floats to come back to life. Last weeks panic selling really upset the apple cart. Ideally I would love to see a multi bagger get retail excited again. Take your time on this critical Monday and let the market dictate how to trade. Do not try to force huge gains out of a situation where they may not exist.


Momentum disclaimer:
Use caution when trading these low float names, they can crash even faster then they rise. Lock profits and do not look back, never play the "what if" game on these names. You can be up or down several hundred or THOUSANDS of dollars in minutes and in the case of a T12 material halt, you could be in for massive pain or worse be trapped in a position for days or weeks until material evidence is sufficient to remove halt.
 

Closing Notes:

Relax and take a deep breath. There is no reason to panic or become frustrated with the market. While I believe we are in a bull market for some time to come, temper your expectations. The period of expansion experienced in the last 12 months has been incredible. 

Not only is it unsustainable but it is historically unhealthy for the markets to continue the way they were. Be thankful the correction came at a time when the economy or we may be having a totally different conversation today. 

Keep risk at the forefront of any strategy you trade. Remain confident in your ability. If you have not traded in a correction before, take your foot off the gas and observe how the market trades.

Thank you again, and remain hungry and humble!

 

Disclaimer: We are not responsible for losses for any reason. We are just an investing club here, seek financial advise from a professional before acting on any of this information. This information is strictly my opinion and what I am seeing in the market. The information above is not a trade recommendation to buy or sell. I am not a licensed broker, dealer or finical adviser. Trading comes with considerable risk and may not be for everyone. Past performance is not indicative of future performance. Never trade with money you can not lose and paper trade to prove profitability before using real money.