Coming off last week’s tremendous gains the market took a slight breather today. AAPL a big winner on the day helped the NASDAQ close in positive territory, but there were very few large movers as many stocks were digesting gains. NFLX another winner of the day soared in after-hours trading after moving higher during regular trading hours. Buyers weren’t interested enough to continue to push stocks well into new high territory. We are, in the near-term overbought so perhaps today shouldn’t be much of a surprise. The trend is still up and while there may be calls for a market top we simply aren’t buying this notion.
NFLX is truly an amazing stock. Moving from the 50s into what could be $400 if the stock continues to gain in after-hours is truly an amazing move. Sure, is the stock likely overvalued at current levels? Why not? Remember when CSCO was overvalued in the mid-90s? Growth stocks tend to get wildly outrageous earnings multiples because there are so few great growth stories. There is no way to know when the trend will end. Therefore, we use our process to identify when it is in our best interests to take chips off the table. Having sell rules helps you maximize your trading gains. It goes a long way if you want to excel.
An interesting development occurred in the commodity space with Crude Oil dropping below the $100 mark in today’s trading. Sure, supply from the boom in US Shale production is likely to blame for the drop in the price. Or we can point to slowing gasoline demand for the cause in lower prices, but what is clear a simply trend following methodology had you short well in advance of this move lower. Trend following doesn’t rely on fundamental calls or any knowledge of what is going on in the Middle East in respects to Oil. Heck even here in the United States. All you need is price and simple rules.
Remember, overbought and overheated markets can always get worse. Proof? Check out the following two charts.
Non-Financial Stocks / Nominal GDP
Market Cap / GDP
In the end, we follow the trend. Who wants to row up a raging river?
