Is The Stock Market Setting Up For A Fall?

One thing every investor should do is look at current market conditions.  Our investment club starts off each meeting doing just that.  We look at a lot of different charts which track trends and patterns.

Some are in confirmed uptrends.

–          The momentum players see this as strength in the market.

Some are indicating possible over bought conditions

And others are close to inflection points with percentage of stocks hitting new highs, or above their 20, 50, 200 moving averages, etc.

–          The contrarians look at the last two groups as signals for a correction.

I’m going to mention one more indicator group which is not usually mentioned.

The IBD50 list of stocks contains a list of growth oriented stocks with good fundamentals and positive chart patterns and setups.

In the latest weekly issue of the IBD paper, half of the stocks, 25 of them, have one or more of the following comments associated with them.

  • Extended from last breakout.
  • Late stage base.
  • Take profits.

Stock

Extended

Late Stage

Profit Taking

OLED

X X

LAM

X

X

NVDA

X

X

ALGN

X
AMAT X

X

WGO

X

X

TRU

X

CGNX

X

TEAM

X

THO

X

X

PYPL

X

CBO

X

X

RHT

X

ON

X

X

CAVM

X

SUPV

X

MA

X

X

ADBE

X

PLNT

X

MNST

X

SITE

X

CBG

X

AVY

X

FLT

X

MSCI X

 

Four of these stocks I am either currently invested in or have been within the last couple weeks.  Five others I have on watch lists and or have been invested in within the past year.

Interestingly enough, AMAT, which is listed as in a risky late stage base and in profit taking zone is also listed in an article, in the same paper, as a possible upcoming earnings call option play.   I wonder if these IBD analysts spend much time talking to each other or reading each other’s work…

Are we due for a correction?

–          The contrarians would say that the risk is higher with so many IBD stocks over extended and in profit taking zones.

Are stocks and the market in full acceleration mode?

–          The momentum traders would say that hitting new highs and either continuing momentum or hitting new buy points is a strong growth indicator.

Regardless of the market direction, it pays to do your homework and look at risk reward ratios.

One possible strategy would be looking at the IBD50 again but this time at the other 25 stocks.  The ones not over extended, in a risky late stage base, or in profit taking zone.  Do any of these show signs of weakness and failing?

Yes, there are a couple which are showing sell signals.  So this is a definite sign of weakness.

Others are testing support which can be a sign of showing possible strength (if it bounces off of support) or weakness (sell signal, if it fails).

Here is the breakdown as I see it.

Testing 10 week line: 

IBD views this inflection point as a test of support and confirmation of upward trend of a growth stock.  Often viewed as a possible secondary entry point if it bounces off of this supporting trend line or a possible sell signal if it falls below the trend line.  I would put these into a watch list:

ICHR, YY, HTHT, PAYC, MCHP

Failed Breakout but still testing 10 week line:

This is a subset of the previous 10 week support line indicator.  These stocks pulled back after passing a buy point and are now testing the trend line.

GWRE, ESNT

Flat Base: 

An IBD consolidation pattern which can signal strength if the lower support range holds and or the stock bounces off of a trend line or passes top level resistance (a buy point).

FIVE

Base on Base:

Another upward trend IBD pattern which investors can view as another secondary buy point.

COR

In Buy Zone: 

IBD defines this as within 5% of a breakout buy point.

FB, MFGP

Double Bottom:

IBD version of a potential reversal pattern and or test of support before a breakout.

VEEV

So of the remaining 25 within the IBD50: 14 are in noteworthy patterns

–          5 stocks are is possible strong buy point patterns:

–          2 are showing weakness but still showing support

–          5 are testing support and at a possible inflection point.

–          2 have flashed sell signals.

So, do you see the market at an inflection point?

Setting up for a correction?

or

Confirming strength and momentum?

Regardless, it is good to do your homework and be ready to action no matter what happens.

 

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Swing Trading

IBD has a relatively new investment service called Swing Trader.  Now, to be fair, there is nothing new about swing trading.  What makes this slightly different is that their swing trades are based on IBD CANSLIM investing.

What is CANSLIM?

It is an investment system based on both fundamental and technical analysis.  CANSLIM is an acronym for the seven traits winning IBD stocks have before they breakout.

  • Current Quarterly Earnings – increasing quarterly sales
  • Annual Earnings Growth – at least 25% or more for the past 3 years.
  • New Product, Service, Management or Price High
  • Supply and Demand – high demand for limited supply of shares.
  • Leader or Laggard – industry leaders with superior earnings and sales.
  • Institutional Sponsorship – funds account for 75% of all market activity.
  • Market Direction – 3 out of 4 stocks follow the market’s trend.

IBD has a 30 day free trial for their Swing Trading service.  I decided to sign up.  Not necessarily to spend even more of my hard earned money but rather to see exactly how well they are doing.   To be honest, one could consider some of my trades swing trading.  My style of investing is quite similar to IBD in that I look for good technical setups and momentum trends of well-run or popular companies; but above all, when it comes to truly short term trades, I look for opportunity.

Case in point, some of my more recent trades were based on what I thought was opportunity.

  • When Amazon announced buying Whole Foods, and selling SEARS Appliances; Home Depot, Walmart, and Best Buy took a price hit yet recovered quite nicely.
  • When Disney announce they were leaving Netflix, NFLX took a price hit, and interestingly enough, filled the gap from their recent quarterly report breakout and found support.
  • And more recently Hurricane recovery trades with Home Depot, Restoration Hardware, Lumber Liquidators, Owens Corning, Generac Holdings and General Motors.

None of these stocks, except NFLX, made it on to the IBD Swing Trader alerts.

Looking back over the IBD Swing Trader alerts for the past year, I am less than impressed with the overall average return of .50%.  However their two currently active trades are based on classic setups and are performing quite nicely.

So, do you ever make short term trades, and if so, what are some of the triggers you look for?

Lessons From A Flash Crash

The last time the stock market flash crashed, I was way over extended with my call options.  I was not paying attention or did not have sufficient alerts set up.  Like many, I was riding the wave of complacency.  The market was in an uptrend and despite minor warning signs, like low volatility, investor over-confidence, and many extended stocks, I was enjoying the relaxing ride.

I lost a ton of money in one day.

This time, with the market in yet another uptrend and a rising peak tide of good sentiment, low volatility, I was mostly in cash.  I had very limited long positions with tight trailing stops and only one call option in play (NVDA}.  Purely a hype play and I sold both call options shortly after the open Friday morning for nearly a 300% gain.

My stops took care of the rest.

I made a nice little profit and managed to protect most of it too.

IBD had a very interesting and timely article regarding the VIX, you can read about it here.

Basically the VIX was at all-time lows and despite a less than favorable UK vote and the ever depressing saga of Trumpolitics, there seemed to be little to no fear in the markets.

That was when it happened.

The VIX  “flashed” an extremely bullish signal (hitting historic lows) shortly before the selloff began.

By the time it was all over the market was down a lot!  It seemed everything lost value Friday.  But then I started looking at some of my watch lists and reading daily recaps and low and behold, the financial sector was up.

With republicans pushing through the repeal of Dodd-Frank and the up-coming Fed meeting where analysts believe rates will go up, Is the tide shifting?

Again, some other timely recap articles mentioned that the financials were bucking the trend and actually showing signs of recovery.  But much of their gains were on low volume.  Other articles talked about how during a correction, certain stocks and certain sectors will hold up better than others.  When the market does recover, and start another uptrend, the new leaders of the rally are rarely the same as the old leaders.

Selected stocks from the sectors which hold up better than the rest during a correction are more likely to be the new leaders.

So the questions are . . .

Is today the beginning of the end for the bull market and the start of the bear?

Or, is it yet another flash crash to bring the high flying market back down to support trend lines?  After all, we have had three of these within the past six months and each time the market recovers.

At least 3 flash crashes in the past 6 months

It certainly looks like a ton of money left the market Friday.  Just look at the formally high flying tech sector.  Interestingly, visually it looks like each crash is progressively more dramatic with more volume.  IF the money left the high flying tech sector, where did it go?

During a correction or consolidation, money basically goes one of three places.

  1. Cash.
  2. Defensive Stocks (like gold or consumer goods, food products and tobacco).
  3. New Sectors.

So to try and answer this I took a look at some screeners.  One is FINVIZ top gainers.  Believe it or not, there were 153 stocks earning over 5% Friday.  That is a lot for such a bad day on the street.

Here is how the 153 broke down sector wise.

Sector Industry Sub-Total
Basic Materials Independent Oil & Gas 20
Basic Materials Oil & Gas Equipment & Services 12
Basic Materials Oil & Gas Drilling & Exploration 6
Basic Materials Oil & Gas Refining & Marketing 4
Basic Materials Gold 1
Basic Materials Industrial Metals & Minerals 1
Basic Materials Major Integrated Oil & Gas 1
Basic Materials Nonmetallic Mineral Mining 1
Basic Materials Oil & Gas Pipelines 1
Basic Materials Steel & Iron 1
48
Consumer Goods Personal Products 3
Consumer Goods Sporting Goods 2
Consumer Goods Textile – Apparel Clothing 2
Consumer Goods Beverages – Soft Drinks 1
Consumer Goods Cleaning Products 1
Consumer Goods Electronic Equipment 1
Consumer Goods Home Furnishings & Fixtures 1
Consumer Goods Textile – Apparel Footwear & Accessories 1
12
Financial Regional – Mid-Atlantic Banks 7
Financial Money Center Banks 2
Financial Regional – Midwest Banks 2
Financial Regional – Northeast Banks 2
Financial Savings & Loans 2
Financial Asset Management 1
Financial Credit Services 1
Financial Investment Brokerage – National 1
Financial Regional – Pacific Banks 1
Financial Regional – Southeast Banks 1
Financial REIT – Diversified 1
Financial REIT – Hotel/Motel 1
Financial REIT – Office 1
23
Healthcare Biotechnology 12
Healthcare Medical Appliances & Equipment 4
Healthcare Medical Instruments & Supplies 3
Healthcare Medical Laboratories & Research 3
Healthcare Drug Delivery 1
23
Industrial Goods Heavy Construction 4
Industrial Goods Industrial Electrical Equipment 2
Industrial Goods General Building Materials 1
7
Services Shipping 8
Services Apparel Stores 6
Services Specialty Retail, Other 5
Services Department Stores 3
Services Home Furnishing Stores 2
Services Air Services, Other 1
Services Business Services 1
Services Education & Training Services 1
Services Gaming Activities 1
Services Publishing – Books 1
Services Restaurants 1
Services Security & Protection Services 1
31
Technology Communication Equipment 2
Technology Semiconductor – Integrated Circuits 2
Technology Application Software 1
Technology Diversified Communication Services 1
Technology Networking & Communication Devices 1
Technology Wireless Communications 1
8
Utilities Diversified Utilities 1
Total                            153

 

Of course, one day does not a trend or correction make but it might be interesting to keep an eye on what the market does, and if it does correct, which sectors hold up better than the rest.

Will it be Basic Materials?  Financials?  Healthcare? Or some yet to be determined sector?

What do you think?

Flash crash, beginning of the end, or market rotation?

Tracking The IBD 50

I love looking at data, discovering new trends, and finding hidden cause and effect relationships.  That is probably why I like spending hours analyzing computer event and security logs.   I also tend to do the same thing researching the stock market, especially when I notice a dramatic change.  In this case, I noticed a lot of new stocks listed on the weekly IBD 50 list.  So, I started something that I have been meaning to do for quite some time but never really got around to it.  Until now.

Tracking the IBD 50 list.

We all know the only state the market stays in is a constant state of change.  Prices fluctuate every day, every minute.  And it stands to reason that any watch list will do the same, though not necessarily on a daily basis.  My “gut” was telling me that the IBD50 list had been fairly stable and now quite a few new members had joined the list.  Conversely, this meant quite a few had fallen off of the list.  Of course I wanted to see the evidence for myself.  So I sat down and started plotting out the last two months or so of reports.

This is what I came up with.

Listed below is the stock symbol, IBD’s Group Classification, and the week the stock appeared / or not on the list.  If it appeared on the list the number is the ranking IBD gave it from 1 – 50 with 1 being the best of the best.  If it did not appear on the list then that week is left blank.

Now I have not had a chance, nor enough back testing evidence, to find out if these changes are due to quarterly reports, market conditions, changes in market cycles, investor/consumer sentiment, hype, fear, or some combination of all of the above.   But at least I seem to have enough proof that my gut was right.

Breaking it down into adds, drops, returns (on,off,back on again), and stay(remains on the list each and every week) and by sectors we get the following.  This was an attempt to see which sectors are strong and remain on the list, weak and dropping off, and gaining by being added to the list.

I’ll be tracking this further as time goes by and reposting any additional insights but I thought I would get it out there for those of you who might be interested.

Competition

stock-trading-competition

My, or rather, our investment club has done quite well since our previous leader mysteriously disappeared and we were forced to “elect” a new leader.  In our case, co-leaders.

We have attracted new members, diversified our topics of discussion, and now have a monthly newsletter which recaps meeting agendas and topics of interest.  The club has a really good mix of growth investors, chartists, value investors and option players.  An interesting thing about this added diversity is that it has really expanded our “Stocks of Interest” section or our meetings and newsletters. 

Previously, any stock list provided was strictly a select list of IBD stocks Don, our previous group leader, picked himself.  In and of itself, IBD is not a bad investment strategy, but it is not the only one.  We now have a good mix of investment ideas and styles which really has added value to the group.

Prior to each monthly meeting, everyone sends in a hand full of stock suggestions as well as any topics of interest that they wish to discuss.  These get added to the newsletter which is distributed prior to each monthly meeting. 

Obviously, these stocks of interest are our monthly watch list but lately it has also turned into a bit of a competition to see who does best.  I call it the WSSG watch list which gets displayed right along with my own BWTB watch list on the side bar.

Last month we had a pretty good discussion comparing different stock screeners and how each of us use them to find potential investment opportunities.  Funny thing about that and our stocks of interest for this month is that it spawned some creative screens. 

For instance, looking for something different to do both my son and I looked for potential setups that we normally may not specifically look for.  He used FINVIZ to pick stocks setting up with potential bullish breakout patterns such as ascending triangles or inverse head and shoulders.  I, wanting to keep with an IBD flavor, looked for IBD momentum stocks with high sales and EPS that are reporting this month. 

All this has me wondering . . .

What other ideas and strategies do people use in investment groups as learning opportunities?