Sunday, April 27, 2014

The Big Picture: Leading Stocks Turn before the Indices

"History doesn't repeat itself but it often rhymes"

We're just a couple months past the 5 year bull rally and it looks like we're getting exhausted.  Maybe we're taking a break before the next move up but no one knows.  What I do know is what has happened in the past.  Take a look at the Nasdaq composite.  This isn't a coincidence.  Resistance to higher levels at this point should be expected.  What concerns me here are a couple of things
1. The last 2 rallies ended almost exactly 5 years (this is likely a coincidence) but for it to happen a third time wouldn't surprise me.
2.  Look at the volume the past 2 months.  Huge selling versus the last couple of years.  This is not good!

The tapering also isn't helping.  And the Fed will continue to taper

For those waiting for SPX and Dow Jones to show further weakness could be a mistake.  Leading stocks always break down before the general market.  This is due to rotations of funds from speculative stocks to less speculative (CAT MSFT MMM PG XOM, pretty much anything in the DJ30 and large cap SPX stocks).  Utilities have be performing great due to low interest rates (look at how well TLT has performed) and its a defensive play.

Here are some examples of what I mean.  During the tech bubble some of the hottest companies during that time ran up substantially.  They also fell faster and harder too.

The Nasdaq Composite peaked out in March 2000, Q1 (it could be another coincidence we're peaking out Q1 2014)

Peaked out January 2000

PCLN - Peaked out from the get go.  Hot IPO that didn't have any legs and just continued to fall.  Sound familiar (KING COUP GRUB etc)

AMZN - Peaked out December 1999

MSFT - Peaked out December 1999

PLUG -Peaked January 2000

I was in high school at the time and I even knew at the time these stocks were some of the hottest tech stocks out there.  Also don't forget about the stocks that didn't survive the bubble.  There were many.

Now take a look at the new leading momo stocks: FEYE, SPLK, DATA, GOOGL, PCLN, WDAY, COUP, TWTR, NOW, YELP, IRBT, QIHU, BLOX, MKTO, NFLX, AMZN.......the list goes on and on because I haven't even mentioned biotech names.

Yes this is tech/biotech sector specific but what leads a market up will probably lead it down.  I don't think we'll get a crash yet but definitely a correction, a bounce here and there, but ultimately a crash is unavoidable.  The market always crashes, it's the nature of investing.  We hit euphoria and ultimately get the worst hangover ever.  Mean reversion.

OR maybe we do continue to fly higher and higher and never come back down.  But if you believe that lets be honest you shouldn't be investing.  Play some defense.  Take some profits from the 5 year bull and see how things play out.  Also note my time frame may be different than yours.  Trade according to your plan.

Good luck and trade em well!  Let me know if you have any questions or comments.


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