Does Diversification Matter?

When markets are rising diversification can help investors from putting too much money in the wrong places. On the flip side, performance will always be just average and those who are able, can outperform.

But, unfortunately when it matters most, as markets decline in earnest, diversification fails. The chart below shows how correlated an in lock step the global markets are when in a steep decline. If you are looking for the solution to manage portfolio risk, diversification does little at the times it is needed most. As such, you better have a plan.

January 2018 Charts on the Move Video

January - in like a lion and out like a lamb. Volatility is back what's it mean for the markets in the short term? This and a look at parabolic blowoffs in this months Charts on the Move video which can be seen here

https://youtu.be/U8bZ_fex0rQ

Lightening II

Back on November 20 of last year I wrote about the possibility of lightening striking twice on ASND stock. The stock was setting up to break out of a cup and handle pattern right after reaching its upside target out of an inverse head and shoulders.  The cup and handle pattern pointed to a 15% upside move. Remember this chart?

As you can see in the chart below, It took 20 days of price grinding sideways before the buyers eventually overwhelmed the sellers and price climbed higher. Much higher. In fact it blew right past the pattern’s target and peaked ~48% above the close on the date of my blog post. 

As you would expect after such a big move in a short period of time and being massively overbought, the stock will need to digest its gains before we are likely to get a clue on what may lay ahead for ASND. The good new is that biotech is on a roll and I expect, once done consolidating, ASND may be ripe for another rip higher. If you took this trade, congratulations. Consider selling ½ and letting the rest run.

18 Years Later

Coming from the industry in my prior life, semiconductor stocks have always been a sector I follow closely. Their heath is a good proxy and gauge of investor’s willingness to take risk. The semiconductor ETF, SMH peaked after its parabolic run-up during the dotcom boom, the same boom that turned into a bust laying waste to pets.com, webvan.com and etoys.com (RIP). SMH finally bottomed during the 08 –’09 financial crises, losing more than 85% of its value from the highs. In 2015 during the markets one year consolidation, SMH formed a huge base (under the red horizontal) from which to launch higher. That huge cup and handle pattern has a target around the $100 level (the blue horizontal line), which just so happen to be where it reached this week and back 18 years ago.

With price sitting well above its 200 day moving average and massively overbought, it needs a rest. As such I would expect to see consolidation (or dare I say even a pullback) in the upcoming days/weeks before it shows its hand on whether this prior resistance level will put throw cold water on the current rally-to-the-moon party. In an ideal world, price would slice right through that critical area of resistance and not look back and the path of least resistance considering the strength of this market.

Too Far, Too Fast?

Turning the calendar to 2018 kicked off an exciting run in stocks as the market moved up almost 4% in 9 short trading days. In 8 of those 9 days the market closed higher and the one red day was down a whopping .1%. These euphoric-type moves can’t last forever especially when you consider how far price is from its 200 day moving average. Bullish RSI momentum has reached an extreme as it exceeded its all-time highs in the SP500, ever. When things become so stretched in one direction the markets need to rest and digest the moves, as such it would be normal and health to see a correction or a consolidation at a minimum.

Looking at the SP500 chart, you can see Tuesday gapped higher at the open and eventually closed below its open and down for the day and with large volume. This is clearly a distribution day. A day when the big money made some moves, locking in some profits. Anytime they speak, we need to listen. Keep in mind it was not just the SP500 that acted this was as almost all US and most foreign indexes followed suit.  Tuesdays’ action in stocks, while not surprising, was a warning shot to the possibility of a short term reversal. One could argue that “short term” price movement is only applicable to traders because investors have a much longer time horizon so there is no need to be concerned with them. This is a true statement but I find being prepared for any possible correction helpful to stay the longer-term course.

In an ordinary market, this gap higher and subsequent fizzle would be a huge red flag and a strong short signal. Unfortunately this is not an ordinary market and normal rules do not apply. We’ve seen poor price action over the last few months, but prices rebounded decisively within days, if not hours. Yesterday’s fizzle is still a significant concern as it usually is a sign of the start of a near-term dip. But without a bearish headline catalyst to drive fear into otherwise confident bulls, I don’t expect this selling to go very far or to dampen bulls’ conviction. If they refuse to sell, then it is much harder for a dip to take hold.  Complacency will eventually get us into trouble, but over the near-term confident owners keep supply tight by refusing to sell every bearish headline and any negative price-action. That said, at some point this unsustainable climb higher will falter. When that occurs is anyone’s guess. There is only so much money willing to chase these record highs even higher and yesterday’s daily reversal suggests we may be getting close to that point, at least over the near-term. One day does not make a trend so we will need to see what sort of follow through, if any, occurs over the next few trading days. If not, it yesterday’s action will just be another bump in the road.

Either way, I don’t trust this market, but because markets can be irrational for longer than we can expect and more importantly it keeps doing the right thing means we stick with it.