It has been a wild ride in the overall stock market during the past month as major market indexes sold off fast and rallied even faster in the most volatile ATR 4-week ATR range we have seen since 2008. In fact, if you go back to when the DJIA, Nasdaq, and SP500 each began trading, there is nowhere at any point in history where we have seen such a volatile up and down move. 1998, 2009, and 2011 had similar V-shaped moves but none were nearly as violent as what we just saw.
Despite this volatility, we were fortunate to navigate the waters quite successfully. We removed our hedges (75% of them) following the huge reversal days of 10/15 and 10/16. On top of that, when we received long signals we took them without prejudice to the historical nature of V-shaped rallies backing and filling their move. So far, unlike right before the downtrend started, all of our new long positions have worked higher. This is usually a positive for continued further gains. If our new longs were failing we would be much more concerned about the current rally.
Our overall market model switched across the board on Thursday to a BUY signal when the market was able to take out the intraday Tuesday highs confirming the move above the 50 day moving average on all the major averages except the NYSE. While the operational BUY mode is what we would consider a late switch overall (due to the V-shaped ramp) this is now our signal that we can increase position sizes in long signals that offer excellent reward to low risk ratios. It is also our signal that we can give our longs more room to pullback so that we may remain in a position for the bulk of its uptrend move.
While we are going into historically/seasonally the most bullish time of the year, we can not ignore that we are starting to get overbought on some oscillators. We are no where near extreme overbought levels but at some point this tape is going to need to consolidate these gains if you want the tape to have a more stable uptrend. If you don’t mind increasing your odds of a flash crash along the way, then the market can rally every day for the next few weeks. This unhealthy action is how you get quick violent corrections. It would be better for the tape to consolidate here. If that does happen and then we breakout higher, we should have a ton of leading stocks that will have formed excellent new pivot point levels from good consolidations.
There are a lot of bullish looking stock setups out there and there are a lot of underinvested bulls after that quick sell off. This could unleash a nice little uptrend to end the year. It just would be nice to get some consolidation first. Overall, the tape looks good, despite that V-shape move on non-impressive volume. If my individual stock patterns were more ominous I would be way more cautious. But for now we do have some nice patterns forming out there, despite the accumulation/distribution ratings of the indexes being so poor. It’s crazy that every sell off comes on huge volume and every rally back to new highs occurs on average to below-average volume with liquidity drying up below the bid and above the ask. However, it is what it is.
I hope everyone had a great Halloween. Front Street was another fun success. I wish you all the best this upcoming week. Stay disciplined and always follow your rules. Thank you for reading. Aloha.
Top Current Holdings – Percent Gain – Date of Signal
VIPS long – 540% – 7/17/13
OVAS long – 93% – 8/8/14
VDSI long – 77% – 8/4/14
AGIO long – 67% – 9/24/14
RENT long – 35% – 9/24/14
