Stocks staged a powerful rally with extremely solid breadth on Friday with volume slightly higher on the Nasdaq and basically flat on the NYSE. The move on Friday sent the SPX and DJIA to new 2016 highs and placed them within reach of new all-time highs. The Nasdaq and RUT remain range bound with the DJT still showcasing weakness overall. Due to the shape of the overall market our models are now under mixed signals with the DJIA SPX under operational BUY signals, the COMPQ NDX RUT and NYSE under operational NEUTRAL signals and the DJT under an operational SELL signal.
A lot of traders believe that the move on Friday was an extremely bullish move and while it very well may be the fact that it was not confirmed across the board definitely leaves a lot to my own personal imagination. It would be a much more bullish setup if we had the COMPQ and RUT leading but it appears with 10 year and 30 year bond yields still crashing that money is finding its way into the big cap dividend heavy indexes due to the highest spread between bond yields and stock yields in 8 years.
This past week, while stocks diverged higher, we saw bond yields hit new lows around the world. This extreme divergence is one of the strangest divergences I have ever seen. Not only did bond yields diverge but so did the British Pound and Crude Oil. Everything decoupled from stock prices which led the VIX to its biggest weekly drop ever. If up is down then down is definitely up as the v-shape moves continue to get more and more volatile. Its amazing to see these indexes retake most to all of the post-Brexit move back in such an extremely short amount of time.
Now I am completely open minded here. While I definitely do not like how the charts look on the indexes and individual stocks (they are loaded with distribution, zero accumulation, and yellow/red BOP) look right now as the indexes hit or near new highs, I will always 100% respect price action and trade off of it alone. That being said, I still know what a healthy uptrend looks like and what an unhealthy trend looks like. This recent move is extremely unhealthy. This is why following Friday’s move, instead of being 100% invested on the long side like you would think I would be with us hitting new highs I am only 45% invested on the long side.
This does not mean that the market can not back and fill and/or start to build out some healthier looking consolidation patterns that allow me to get long high quality names breaking out of high quality patterns but the odds of that happening here in the short-term based on what I see in my scans appears to be slim to none. Despite the gains the past week, it is still extremely messy out there and seasonally we are not in a historically bullish time frame for stocks. More volatility or chop should be expected at best and a complete reversal should be expected at worst. The risk to the downside based on the v-shaped moves continues to greatly outweigh the upside potential reward.
This move to new highs or near new highs is also a testament to following your trading rules. Post-Brexit I actually entertained the idea for a few seconds of selling off my entire long portfolios. I decided to let my stops work and listen to the price action that followed instead. I got knocked out of some names that are still weak, I got knocked out of a few names that are higher, and I am still long a lot of names that are now hitting new highs. Still, rather the stocks are still working, have reversed, or have not reversed, they are all still very ugly overall. There is nothing out there that has me licking my chops on an EOD trend following basis.
As long as this volatility remains I will continue to focus on daytrading opportunities in low priced stocks that are moving pre market due to significant news. BGI, LEDS, and DGLY are just a few examples this week of stocks that setup in the morning and went on to produce huge gains. We also saw our oversold RSI plays MRNS move significantly following FCSC last week and INFI started to move on Friday. As long as this market continues to trade in such a volatile non-trend friendly fashion I am going to continue to focus my capital on short-term intraday and swing trade opportunities.
I suggest to keep an open mind out there and not have your personal opinions of the state of the geopolitical world effect your trading. Price is all that matters. Obey it and nothing else. As long as these v-shaped moves are the norm, I am going to continue to trade very small on an EOD trend following basis using only 1%-5% of my account capital per position per trade while keeping the daytrades and swing trades to 5%-20% of my account capital per trade. It’s just too risky right now with all of the uncertainties. The market is going to have to calm down and better charts materialize before I start swinging for the fences on a longer term time frame. My best guess is that will not be until at least September/October. Even then, we have an election to deal with then in November.
Enjoy the volatility everyone. I wish you all the best during the upcoming week. Stay focused, obey your stops, and trade smart. If you would like to join or take a free trial with us to see what we are all about 2,000 miles away from the mainland USA feel free by clicking here. Aloha from Maui.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
CLR long – +132% – 2/11/16
EBIO long – +82% – 5/26/16
GRAM long – +72% – 4/1/16
HBP long – +62% – 3/28/16
SIMO long – +52% – 3/11/16
APLP long – +28% – 3/31/16
FCPT long – +27% – 2/29/16
ALRM long – +26% – 3/2/16
HNNA long – +26% – 4/14/16
