$SPY tested its rising 50dma for a second time in two weeks. Technicians say that the more one level is tested, the weaker it becomes and the more likely to be taken out. A break below the 50dma is not the end of the world. Many trends test their longer-term moving averages before they resume higher – 100dma, 200dma and even the 50-week MA.

It is a very choppy environment, but opportunities abound for nimble traders who have managed to adjust to the range-bound market environment. Most of the trends last up to 2-3 days before there is a major price reaction. We need to start every day with an open mind and be prepared to see everything.

Three industries stood above the rest last week:
- restaurants: tepid inflation coupled with rising consumer confidence and pure price momentum send stocks $CHUY, $SONC and $RUTH at new multi-year highs. There are a lot more names in the group that are hovering near 52-week highs: $CMG, $TXRH, etc.
- media: the ongoing consolidation in the field is re-pricing the whole TV broadcasting industry. Many of the stocks in the group gained more than 5% last week: $SBGI, $NXST, $SSP, $TVL, etc.
- mortgage investment companies were among the best performers in 2012 and it looks like are returning back to fashion: $OCN, $HLSS, $NSM, $ASPS, etc.

Patterns repeat all the time in financial markets. The only things that change are the names of the symbols involved. Corrections through price and time are a normal stage of any liquidity cycle and they should be embraced as playing a crucial role in the discovery of future leaders. The silver lining of all market corrections is that they highlight the strong stocks with organic demand or real alpha. Pay attention to stocks that make new 52-week highs or gain more than 3% on big down days. For example, during the selloff on Wednesday, one of the very few stocks that made new all-time highs was $CSOD. Then, it proceeded to spike more than 5% near the end of the week.

Most stocks dipped on Friday, when the $SPY struggled just below its already declining 20-day moving average. Here are six St50 members that showed relative strength:

In the book Hedge Fund Market Wizards, one of the featured traders (Jamie Mai) talks about two types of risk – identified and unidentified:

Markets tend to over-discount the uncertainty related to identified risks. Conversely, markets tend to under-discount risks that have not yet been expressly identified. Whenever the market is pointing at something and saying this is a risk to be concerned about, in my experience, most of the time, the risk ends up being not as bad as the market anticipated.

There are two major macro factors that seem to account for the majority of the recent market volatility:
- the re-winding of the Japanese Yen carry trade
- the discounting of potential tapering in the FED’s open market operations

The big question is how much of those risks have already been discounted by the market? They have already been covered extensively by the press, which by no means guarantees their impact will be reduced.

What I wrote about the market on June 6th continues to play out:

There is still plenty of risk appetite for buying dips in select U.S. equities. Today’s bounce does not change the big picture. We are still in a range-bound market environment with elevated volatility – an environment that is known to produce a lot of fake breakouts and breakdowns and be more favorable to mean-reversion setups from important technical levels. This does not mean that the market won’t look strong or weak for 2-3 days in a row. It will look strong or weak long enough to convince most market participants to lay in one direction and then it will swiftly pull the rug under their feet.

With that in mind, there are still plenty of opportunities for nimble traders that manage to quickly adjust to the new market environment and realize that many breakouts and breakdowns are likely to deliver a lot smaller gains than what we got used to in the first 5 months of the year.

The post It Is A Very Choppy Environment, But Opportunities Abound For Nimble Traders appeared first on Ivanhoff Capital.

Amazon’s founder and CEO, Jeff Bezos does not believe so. He thinks about what will not change 10 years from now and builds Amazon’s long-term strategy around those constants. Lower prices, great service, faster deliveries and greater product selection – these are cornerstones that are not going to change no matter what. People are not likely to ask to pay more, receive their deliveries slower, have less to choose from and get crappy customer service.

If you stop to innovate, you better close doors and give the money back to your shareholders. This is what corporate America has been doing lately. Not the part about closing doors, but the part about giving back shareholders money through hefty dividends and buybacks. Wal-Mart is the latest example. They announced a new $15 Billion buyback on Friday. Borrowing for share repurchases is the new game in town and almost everyone is playing. Not, Amazon. Yes, they also took advantage of the record low interest rate environment to borrow, but one cannot blame them for lack of ideas where to put their money to work. Amazon continues to innovate and invest in its platform as if it was day one of its journey.

Over the past week alone, Amazon opened its first online store in India, announced that it will sell Kindles in China and expand its nationwide same-day grocery delivery service in the U.S. The market seems to be liking Amazon’s geographic and product expansion. Shares of the online retail giant gained 3% in a volatile week and are trading within very close proximity of their all-time highs of $284.72.

This is not even the big picture of why you might want to consider Amazon as a long-term holding. In 2001, e-commerce accounted for less than 1% of the total retail revenue in the U.S. Today, this number is still only 6.5% in the U.S, which accounts for 5% of the world population. The percentage of online sales is much smaller in the rest of the globe and it is bound to quickly grow in the next decade. If I had to choose one company that is likely to benefit the most from this huge e-commerce trend, it would be Amazon.

The post Amazon Continues To Take Over The Retail World One Step At A Time appeared first on Ivanhoff Capital.

The good news – the recent pullback has helped form quite a few good risk to reward setups. A lot of stocks consolidated side-ways and started to break out near the end of the week when the market averages bounced higher. The St50 list gained 0.93% for the week, outperforming the averages.

The bad news – we are still in a range-bound market, which will continue to deliver a lot of fake breakouts and breakdowns.

Speaking of range-bound and fakeouts, this seems like a good time to talk about the so called “taxi driver syndrome”: people tend to get more active where there is less work to do in order to compensate for the smaller revenue stream and less active when there is a lot of work. In reality, they would do a lot better if they are more active when there is more work to do and just take the day off when there is less work. The same applies to traders and investors. In a higher volatility environment most people naturally make less money, so to compensate, they trade more and try harder for little or even negative results. In clean trending environments is a lot easier to make money, so most people don’t sweat it too much and don’t press to take advantage of the opportunities.

People’s expectations for making equal amount of money every week or month could cause a lot of harm. The return curve in the market has very fat tails – a few stocks and a few months will account for the majority of your annual gains.

Let’s take a quick look at the major asset classes to see where we stand:

The U.S. Dollar ($UUP) has its worst week in months. The only commodity that benefited from the Dollar’s weakness was crude oil ($USO), which spiked close to 5%. When all is said and done, the “black gold” is still in no man’s land and it doesn’t seem to be going anywhere soon.

The U.S. Dollar and U.S. equities have been going in the same direction for the better part of 2013 and they finally part ways last week. One week does not make a trend, but it is something to watch carefully. Correlations change, but they also tend to continue for years as this chart from Chris Kimble reveals:

Speaking of divergencies, have you looked at emerging markets ($EEM) lately? They have been underperforming in 2013 and last week broke down to levels not seen since last December, where they sit at major support. The odds are that we might see some type of a bounce there in the coming couple weeks. Despite the weakness in emerging markets, many of the Chinese ADRs are in good shape and had another decent week – $JOBS, $SINA, $BIDU, $CTRP etc.

Interest rates continue to rise as U.S. Treasuries ($TLT) lost ground for a 7th week in a row, dropping to new 52-week lows. Despite the recent spike in yields, they are still near historic lows and financial stocks continue to benefit from the steepening of the yield curve. Among the biggest gainers last week were investment banks, brokers and asset management firms.

Cancel that vacation to Japan. The Yen ($FXY) had a monstrous week and recovered some of its humongous losses since December, but it is still in a downtrend. There are trillions of dollars behind the yen carry trade and the moves there have major implications for all asset classes. Strong Yen is supposed to be negative for equities, but we saw a divergence in that relation near the end of the week.

Take a look at the latest St50 List here.

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There is still plenty of risk appetite for buying dips in select U.S. equities. Today’s bounce does not change the big picture. We are still in a range-bound market environment with elevated volatility – an environment that is known to produce a lot of fake breakouts and breakdowns and be more favorable to mean-reversion setups from important technical levels (look at the bounces in $SPY and $IYR today). This does not mean that the market won’t look strong or weak for 2-3 days in a row. It will look strong or weak long enough to convince most market participants to lay in one direction and then it will swiftly pull the rug under their feet.

With that in mind, there are still plenty of opportunities for nimble traders that manage to quickly adjust to the new market environment and realize that many breakouts and breakdowns are likely to deliver a lot smaller gains than what we got used to in the first 5 months of the year. Here are six stocks that have managed to withstand the pullback and are setting up again:

The post If This Bounce Has Any Legs, Watch Those Six Stocks appeared first on Ivanhoff Capital.

If you expect the media to tell you that we are in a correction, you will have to wait for a 10% pullback for that to happen. This is not helpful. We have to observe the subtle changes in market character and manage risk proactively and in real time.

After the reversal on May 22nd, I mentioned that we have entered a new market environment that will require tactical adjustment. The chasing is not going to be mindless anymore and we are likely to see a lot of false breakouts and breakdowns. Overly active traders that fail to recognize the changes are likely to suffer a “death by thousand cuts”.

So has the market changed? Look at the 30 min chart of the $SPY below. One of the better definitions of a healthy trending market is one that trends above a rising 5 day moving average (which was the case for the better part of May) or below a declining 5 day moving average (which we haven’t seen since last November). The new reality – high volatile choppiness. The $SPY pierced through its 5 day moving average (which on a 30 min bars is 65-period MA) seven times over the past seven days.

The St50 list gained 0.5% for the week, but under the surface there was a lot of damage that became especially pronounced on Friday afternoon and many of the price leaders gave back a substantial part of their weekly gain.

The weakness on Friday was all-encompassing, but especially heavy in energy, basic materials and emerging markets. The St50 list managed to finish green for the week only because it has very little exposure to those sectors.

There were four earnings reports on the St50 list last week – all of them saw relatively positive market reaction: $KORS $SPLK $LGF $GWRE.

What else important happened last week

The most interest rate sensitive assets continue to get clobbered in an accelerated fashion as fears of the FED tapering its monetary efforts are driving the yield higher across the whole risk curve.

The financial sector exhibited notable relative strength.

This is what happens in an environment of rising interest rates expectations. The yield curve is getting steeper. People are more likely to borrow today if they expect the cost of borrowing to rise tomorrow;

Market exchanges and brokers are also seeing buying interest as the market is betting that people’s interest in equities is gradually returning.

The Ultimate contrarian indicator resurfaced. A non-business media featured the stock market in positive light on its cover. Covers are not a precise timing tool, but it is something to keep in mind as financial markets are often counter-intuitive to common Main street’s logic.

Consumer confidence is at multi-year highs. Apparel retailers had a decent week.

Corporate buybacks continue with full force.

Priceline issued convertible notes for $1B to finance stock repurchases. Data shows that most of those buybacks are done to mask the dilution caused by executive stock options. Nevertheless, it is a net positive for the shareholders in short-term perspective. Long-term, not so much – companies are increasing their debt levels and buying back assets at very high valuations. Everyone is myopic and everyone is focused on short-term results, so this is what we have. Borrowing for buybacks is the most popular game in town and everyone is playing it, which puts an underlying bid for equities. The bull market in the mid 80s was also fueled by buybacks. The difference is that this time, the interest rates are a lot lower.

There is no scarcity of good looking long setups on the St50 list and in the market in general – $CHUY $AMBA $CERN $PRO $CERN $EFII $ININ. In high-volatile, choppy environment, the success rates of breakouts is a lot lower. Many will either fail to follow through or deliver much smaller gains than usual. Welcome to the range-bound market reality. The more active you are, the bigger the damage you are likely to cause to your capital. One way to deal with the new reality is to do less and cut position size.

See the latest St50 list here.

The post Do Less, Cut Position Size appeared first on Ivanhoff Capital.

The most interest rate sensitive assets continue to be under pressure and deteriorate in an accelerated fashion, to a point that it won’t be a surprise if we see some snap-back mean-reversion later this week. The premise is that a potential QE tapering will lead to an increase in yields across the board. Notice that the FED might be months away from changing its policy, but it does not matter to the market. Financial markets live in the future and are forward looking by nature. They constantly discount events that have not happened yet. As a consequence, they will sometimes discount events that will never happen. When the expected events don’t occur, markets self-correct.

The element of speculation is an inherent part of the market and it is a major moving force. You better accept it and find a way to deal with it. Prices changes when expectations change and expectations could and often change much before fundamentals change. This is why price is considered a leading indicator – sometimes ends up being right, sometimes ends up being wrong, but it is leading nonetheless.

The post Prices Change When Expectations Change appeared first on Ivanhoff Capital.

The post Five Stocks Waiting To Break Out to New 52-Week Highs appeared first on Ivanhoff Capital.

In theory, a stock split should not have any impact on stock market performance, let alone generate any alpha.  It turns out that in practice, it does. At least, it did over the past ten years according to Mark Hulbert and WSJ.

A company with 30 million shares outstanding earning $2 per share, will have 60 million shares earning $1 per share after a 2 for 1 split. The total earnings remain the same after the split. There should be no positive reaction by the stock market. The truth is that in short-term perspective, mood and psychology could trump math. And short-term could sometimes mean years.

The reality is that stock splits are often a side effect of momentum. Companies often decide to split their shares after they had a spectacular run. The ensuing outperformance is not a consequence of the split but a mere continuation of an ongoing earnings, sales and price momentum.

One more argument that Relative Strength is among the most consistent and reliable equity selection criteria. Relative strength is not flawless. Historically, it has worked best when measured on a 3 to 18-month basis. Beyond 3 years, it often leads to mean-reversion. With other words. The best performing stocks of the past six months, are very likely to continue to outperform in the next 6 months. But, the best performers of the past 3-5 years, are very likely to underperform in the next 3-5 years.

The post Why Stock Splits Beat The Market appeared first on Ivanhoff Capital.

All major indexes are still above their rising 50dmas. Technically, the trend is still up, but it would be foolish not to pay attention to the sudden increase in short-term volatility. This is how many trends end. And by “end”, I don’t mean falling apart, but just entering a potential distribution phase, where many stocks are transferred from strong hands to weak hands, volatility is elevated, there are a lot of fake breakouts and breakdowns and short-term mean-reversion has higher probability of success.

Unusual price action reveals a lot about the current incentives and state of mind of all market participants. What did we learn from the price action after the reversal on Wednesday:

- people are still with one leg out of the door, uncomfortably long and under-invested. Most rather see and buy at lower prices, which means that the real surprise is still to the upside;

- dips to major moving averages (20, 50, etc.) are welcomed as buying opportunities. This time, there was no hesitation, fear or second-guessing. People stepped up and bought. The question is how long are they going to hold?

- markets are already discounting the gradual tapering of QE. The yield is rallying. Bonds are under pressure. Utilities and REITS were among the worst performers last week. Financial markets are forward looking. Prices change when expectations change.

In a rising interest rate environment, financial stocks are typically among the first beneficiaries. It is worth paying particular attention to this sector.

From technical perspective, the healthcare sector looks better positioned. $JAZZ, $ALKS, $VRX and many others from the group, held remarkably well during the market pullback and are trading near multi-year highs.

Only two months ago, the mere mentioning of solar stocks in a positive light was a sure way to receive a ton of hate-mail and ridicule. All of a sudden, in the past week, everyone loved solar and the small cap stocks from the industry just went parabolic. I will repeat what I have said several times already – solar is to 2013 what homebuilders were to 2012 – the industry that will outperform all others while surprising the majority of skeptics.

There are still plenty of stocks that are holding well and offer good risk/reward opportunities. Keep in mind that in high-volatile, range-bound environment there will be a lot more failed breakouts and breakdowns. Some of the better looking setups for next week include: $CHUY $GNC $MX $IMMR $ARMH …

This is a reprint of my weekly ST50 review. See the latest list here.

The post A Not So Subtle Change Of Character appeared first on Ivanhoff Capital.

Every couple weeks or so, bears show up and boldly try to call a top, acting like we don’t remember the last time they made the same call. You saw the ton of posts on the potential QE tapering last weekend and the potential negative consequences for equities. Guess what, there is no difference between being early and being wrong, depending on your time-frame of course. If your timeframe is eternity and you don’t take into account opportunity costs, then eventually you will be right, if this is what is important to you. I rather make money.

There are two type of markets – trending and range-bound and they come after each other in an endless cycle. Our job is not to complain about divergences and to ponder on the potential impact of central banks’ monetary policies. Our job is to take full advantage of healthy market and to manage risk.

All stocks that consolidated sideways for the past two to four weeks, are breaking out, one after another. This is what happens in trending markets. Price momentum is the catalyst. The fear of missing out trumps the fear of losing. They say that happy people pay happy prices, but bull markets persist because people don’t believe in them. Bull markets climb the proverbial wall of worry. People say that they don’t want to chase and yet corrections last a couple hours. The slightest dips are getting bought.

A bull market will bail you out and it will forgive your mistakes, but if you really want to outperform, you either have to pay attention to sector rotation or have the discipline to stick with your winners long enough to make a difference. When there are so many good looking technical setups out there, it is enticing to jump from stock to stock and chase after multiple small percentage gains, but looking back you will realize that this is not the wisest approach.

Refiners ($TSO, $CVI, $PSX…) and oil & gas svs ($FTI, $COG…) stocks started breaking out on Friday. Many of them are still close to their bases and it seems like the next beneficiary of an ongoing sector rotation, so you might want to pay attention to this sector. The success rate of breakouts will depend a lot on the price action in crude oil.

It is absolutely amazing how energy and basic material stocks could stay near multi-year highs given the strong price action in the U.S. Dollar. Other cyclicals have also been extremely strong – financials, homebuilders, industrials, even semi-conductors under the surface.

Short squeezes continue with full force and happen even in stocks with questionable fundamentals. In fact, big short squeezes always happen in stocks with questionable fundamentals. Their short interest would not be high, if everything was dandy there. I guess this is one of the reasons why two of the most controversial industries of the past few years, have been leading in the past month or so – solar and education stocks.

Large ticket stocks like $PCLN, $CRM and $GOOG are charging higher and for a good reason – the fastest way to gain market exposure is via high-liquid, high ticket momentum stocks.

There is always something to worry about. Yes, it is getting a little frothy out there with recent IPOs running wild. By no means, it is “1999-kind of” wild. Actually, IPOs outperforming is a good sign of risk appetite.

The new all-time high list is super-diverse and the number of stocks making annual highs is at levels last seen in 2010. Usually extreme levels lead to some form of mean-reversion, but trends could continue longer than contrarians could remain solvent. And as we have talked multiple times on this site, sometimes being a contrarian means staying with the underlying trend.

This is a reprint of my St50 weekly market review. You could see my latest list here.

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