Monday, November 16, 2015

The Bulls Are Out of Breath

The Bulls Are Out of Breath

The market had a great bullish run of +10% in $SPY in six weeks since the September lows.  Last week the bulls were exhibiting signs of exhaustion and were running out of breath in their advance to punch through the ceiling of 213.34 in $SPY from mid June.  Institutions came in droves beginning of the week on Monday and by Wednesday, they had started getting rid of all retail and technology related stocks with increasing volume.

The $SPY dropped by 3% in the last 3 days of trading.  Leading sectors $XLY and $XLK that had been doing so well for the last 5 months, dropped by 5% within just a few sessions. Currently they are all trading below the 34 day ema.  It took the market several weeks to gain 10% only to lose more than a third of that gain within a week.  None of the sectors were spared last week because there are signs of lack of global demand.  Oil has begun to slide down to $40 a barrel and other commodities like copper, silver, gold and other metals use in the industrial sector are reaching their all time lows.

Conserve your portfolio

This is the time to be very defensive with your portfolio and to stay disciplined.  Cut your losses with any position that hits your loss target. Retail apparel stores really took it on the chin last week with some stores like $M, $TIF, $JWN and $DDS dropping by 15% to 18% with disappointing earnings and outlook.  Other retail related firms like $ULTA and $NKE dropped by 10%.  The retail apparel sector depend on increasing sales and earnings from back to school season to buy their merchandize for holiday sales.  They make 40% of their yearly profits in the last 6 weeks of the year.  Their disappointing sales and profits in the third quarter means that they will have less capital at their disposal to fill their stores with merchandize for holiday sales.  Outlook for the retail sector is not good and as such it is best to cut your losses and conserve your capital for the next opportunity in other leading sector.

Some of us are still licking our wounds from the deep correction we had on August 24th.  We do not want to be in that position ever again.  The market has repeatedly dropped down from 8 day ema to 34 day ema in as little as 3 to 5 sessions during minor correction of 5% to 10%.  Hoping that the position you have will recoup the losses and come back in the next couple of sessions is not a good strategy.  If the position has met its loss target than it is time to pull the plug on the position before a minor loss turns into a major one.

Positions Closed out for a Loss

The first week of November was the sixth week of the rally and the market was making rapid advances to all time highs of June on $SPY.  Last year in mid October, the market took off for the following 6 weeks in a similar manner only to take a breather by end of November.  The market moved sideways for the following several weeks after that.  I have held losing positions in the past that met their loss target for a session or two, only to have that minor loss turn into a major one.  Last Friday I closed out my debit spread option position on $ORLY for a loss because the stock dropped to the loss threshold on my trade plan for that position.   I closed out my November credit spread option position on $NKE for a loss too.  I could have waited 5 more sessions for the option to expire but there is the inherent risk of the stock going even further below my loss target which loses me even more money.

Stocks on the Horizon

Currently we have 11 distribution days (days of heavy institutional selling volume) and most of them have occurred in the last two weeks - which is very concerning to me.  This is not the time to put out a lot of cash for new bullish positions. Asian markets of Japan (-1%) and Hong Kong (-1.5%) are down as of 9.30 pm Sunday evening as I am preparing this post.   Some of the stocks that have still maintained their momentum are:

  • $MCD
  • $DIS
  • $FISV
  • $LUV
  • $AMZN
  • $CBOE
  • $NVDA
  • $LNKD
  • $GOOGL
  • $NTES

I will focus virtual trades Monday morning on some of these stocks and stay on the sidelines for now.  I will observe the actions of institutions this week for clues as to the sectors and stocks that they are deploying their capital. 

Happy Trading!


























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