Midnight Trader

We’ve all heard tales of the painfully boring summer trading months. Nothing important is supposed to happen in July and August. The movers and shakers are living it up in the Hamptons and trading rooms are quiet, right? So shouldn’t I leave comforting glare of the monitors and hit the beach?

Maybe. 

After all, there is some truth to the summer doldrums tales. July is the beginning of the Nasdaq’s worst four months of the year. And according to the Stock Trader’s Almanac, August is the worst month for the Dow, S&P and Nasdaq since 1987. Surprised? Not if you were conscious just four short years ago during the first eurozone trip to panic-town. The swift crash of late-July and August knocked the S&P within a hair of a legit 20% correction in 2011:

And what about more recent years? A tame July led to a modest August rally in 2012, the market gave back almost all of its July gains in August 2013, and a late July dip was eagerly bought in 2014:

The late summer months certainly have been very interesting over the past few years. And after a painfully boring start to 2015, we now have a laundry list of big and not-so-big events. Macro news and key breakouts/breakdowns are popping up all over the place. We have: 

Anything related to Greece

The collapsing China bull

Puerto Rico’s “unpayable” debt

Dollar index waking up 

Crude crashing— again

Copper crashing—again

Gold crashing—again

Silver crashing—again

Donald Trump running for president

Sure, it was a slow start to the year. But it looks like the next six months could really turn up the heat. 

So much for the summer doldrums. 

— Follow me on Twitter

The big tech stocks haven’t been setting the world on fire lately. But a couple of key breakouts could help vault this sector back into a leadership role this week.

Sure, the Technology Select Sector SPDR (NYSE:XLK) has (barely) bested the S&P 500 this year. However, most of its major components have been playing Sleeping Beauty for months. Apple has churned sideways since February. Microsoft is flat on the year. Verizon is up a few bucks—but has fallen off over the past six weeks.   

But it looks like some of these stocks are finally starting to wipe the crust out of their eyes. Could we be witnessing a couple of new market leaders emerging from this group? 

Facebook (NASDAQ:FB) has quickly sprinted to new highs this week. Sure, the short-term gains are great. But it’s even more impressive when you take a step back and realize that this stock hadn’t done anything for investors in almost a year. This week’s move is a huge longer-term breakout in the works, as evidenced by this weekly chart: 

Google (NASDAQ:GOOGL) is also getting up off the mat. Google has yanked investors’ chains for close to 18 months. But now, this stock is up six days in a row and punching through a trading range that has trapped it since April. 

Early signs of strength? Maybe: 

Then there’s Apple (NASDAQ:AAPL). Apple’s the big dog in XLK-- weighted close to 18%. This one is still sleepy, yet it could be coiling for a significant move:

We’ve enjoyed a stock picker’s market this year. Following the leaders has been the most profitable move as the major averages have chopped along. If we are setting up for rotation into tech names, I want to scoop up some of these potential market leaders as we head into the summer doldrums. 

— Follow me on Twitter

Smoking takes ten years off your life. Well it's the ten worst years, isn't it folks? It's the ones at the end! It's the wheelchair, kidney dialysis, adult diaper f**king years. You can have those years! We don't want 'em, alright?

-Denis Leary 

"The First Person To Live To 150 Is Alive Today."

Think about that for a moment. I don’t believe the reality of this prediction has set in just yet. In fact, I think it could take decades before we realize what the hell this actually means for society-- and our investments. 

It’s astonishing how far we’ve come in such a short period of time. My great grandfather died of the Spanish Flu on his farm in North Dakota at the ripe young age of 28 a little less than a century ago-- and now we’re talking about the possibility of the average person biting off one hundred birthdays like it’s no big deal.

If an aging baby boomer population has already jostled the markets, just imagine what will happen when we have generations of elderly people sitting around all at once. I wouldn’t even know how to begin to prepare for that-- and I might actually be around to see the beginning of it. 

So let’s take a look at some of the bigger questions that will inevitably pop up as the world truly begins to live long and prosper:

Retirement 

My financial advisor recommends planning out to the age that 25% of folks the same age as me (born 1980) are expected to live to see. That would be 91, according to their numbers. And I grew up in an era when it was socially acceptable to give your kids juice and let them play outdoors. 

Yet we still see headlines like this crop up all the time:

Do we really hate our jobs that much? Do most people think they can feasibly just drop out of the work force before they turn 60 and have no money troubles forty years later? That’s preposterous. 

If we do start living an extra 50 or 60 years, we’re going to have to rethink the entire notion of retirement, what it means, and when it should happen. Because right now, we’re stuck in the past. 

Trends and cycles

It’s nearly impossible to discount the power of demographics on investing cycles. After all, baby boomers ignited a stock market rally that lasted nearly 20 years. Millions of investors pouring their money into equities for two decades helped fuel the 80s and 90s bull markets. So what happens when millennials’ prime investment years stretch into their 70s and 80s --and beyond?

Will we bear witness to longer and longer bull market cycles over the next several decades-- complete with sharp, 1987-esque resets to keep investors honest? It’s possible. 

Investments

The obvious home run investments will be the breakthrough health care and biotechnology companies that help us maintain our quality of life when we’re a bunch of centarians. The not-so-obvious part right now is figuring out which specific investments will keep their promises and change the world. 

The stuff we do to patients in hospitals now will be seen as barbaric 50 years from now. We’ll probably 3D-print body parts and fix problems form the inside-out with nanobots in the future instead of chopping off limbs and putting patients under the knife. 

Quality of life will become so important that it’s difficult for me to overstate it. If you've spent any length of time with an elderly person in their 90s you know exactly what I’m talking about. Living past 100 won’t mean anything if no one can enjoy it. The companies that can solve this problem will mint fortunes. 

Naturally, if I was forced to dump all of my money into a sector and let it sit for 50 years, I can't come up with a good reason why it wouldn’t be health care/biotech (even as the sector continues to mock me since I said it probably needed to correct back in May). What other trend could possibly eclipse it this century? 

It’s certainly something to think about. 

— Follow me on Twitter

The stock market’s waning breadth has been well documented over the past couple of weeks. And the way market leadership has thinned out, it’s tough to remain bullish right now. 

However, there’s some interesting action in small-cap stocks that you shouldn’t ignore. 

First, let’s go back to the October swoon-that-almost-turned-into-a-correction. Small-cap stocks were the first to bottom out (on Oct. 14-- a full 48-hours before the S&P began to turn higher). This initial move off its lows proved to be the fuel the Russell 2000 needed to finally get some positive momentum. Since Oct. 14, the small-cap index has nearly doubled the S&P’s performance:

Keep in mind, the Russell 2000 didn’t exactly play ball in 2014. Large-caps started to eclipse the once-strong Russell in early April. When all was said and done, the S&P returned about 11% in 2014, compared to a return of just 3.5% from a choppy Russell. So when small stocks began to gain momentum last fall, looked like they were about to wake up from their extended consolidation.

But after that initial powerful burst, small-caps have had a bit of trouble getting any separation. 

Fast forward to 2015, and the small-cap universe has remained largely anchored to their large-cap cousins. After briefly attempting to pull away in the spring, the S&P reeled in the Russell back in early May.

Can small stocks retake a leadership role here? They’re showing signs that they might be ready. 

Both the iShares Russell Microcap Index Fund (NYSE:IWC) and the Russell 2000 iShares (NYSE:IWM) are closer to their 52-week highs than the S&P-- and both look constructive as the S&P and Dow continue to fade below their respective 50-day moving averages. 

That’s definitely something I’ll be watching in the days ahead. 

— Follow me on Twitter

The bull’s getting old. 

Unless the earth opens up and swallows us whole sometime in the few weeks, it looks like the current bull market will soon surpass the 1949-1956 run to become the second longest streak in U.S. history.

But that’s nothing.

The greatest bull market of all time lasted from December 1987 to early 2000-- 4,494 days, according to CNN Money. It’s also no coincidence that the 90s was a great time to be a young music fan. 

So to honor the tech bubble and the magical decade I was lucky enough to experience firsthand, I present the 5 greatest bull market rock albums of the 90s.

Here they are in chronological order:  

1. Nirvana Nevermind

Release date: September 24, 1991 1991 S&P 500 performance: +26%

I’m legally obligated to include this album anytime the 90s are mentioned, so let’s just get it out of the way first. Yes, Kurt Cobain and Nirvana defined the decade. And this is also one of those albums that every kid owned and talked about for years. 

Is it a coincidence that the S&P returned 26% in ‘91-- yet had one of only two negative years for the decade in ‘94-- the same year Cobain killed himself? Of course not.  

I can’t tell  you where I was when I heard “Smells Like Teen Spirit” for the first time. But I do remember arguing over the indecipherable lyrics (no Google) with my friends in algebra class and amassing an impressive collection of flannel that lasted me well into high school. 

Nirvana taught me how to act cool.  It didn’t work, but they tried.

2. Smashing Pumpkins Siamese Dream

Release date: July 27, 1993 1993 S&P 500 performance: +7%

1993 was a huge year. One of my friends got AOL. The video game Doom was released. And Siamese Dream was the first album I owned that I would listen to all the way through-- on repeat-- for hours.

I loved Billy Corgan’s weird voice, the buzzy guitars and that mix of huge, heavy songs with delicate ballads like “Soma” that would just build and build until they exploded. Everything about this album is a contradiction. It’s big and optimistic, yet pretty damn sad, too. 

Bill was right-- today is the greatest. Amazing things were happening. We were ready for liftoff. 

3. Weezer Weezer (The Blue Album)

Release date: May 10, 1994 Price of a barrel of oil in 1994: about $20

While every grunge kid was still strategically tearing his jeans, Weezer comes out of nowhere with a masterpiece of an album that perfectly blended pop and nerd-rock. It was emo before emo even existed.  

Yes, Pinkerton has a lot more depth. And many music fans point to it as the Weezer’s ultimate achievement before the group went completely off the rails with the next half-dozen offerings. But there’s something so innocent and fun about the blue album that I’ll always love. 

Also, it’s important to note that Rivers Cuomo is a contrarian-- in his music and investment strategies. Consider these lyrics from “Surf Wax America”:

You take your car to work, I’ll take my board And when you’re out of fuel, I’m still afloat 

Clearly, Cuomo is predicting the oil spike that occurred more than a decade after he wrote this song. I wonder when he’s going to launch a newsletter. 

4. Sublime Sublime

Release date: July 30, 1996 1996 S&P 500 performance: +20%

The dot-com boom was in full force when Sublime blended rock, hip-hop, reggae, and ska into a summer house party. The California vibes on Sublime were palpable. I had never set foot in the state before, but I totally felt at one with Long Beach after three or four listens. As a result, this CD remained in heavy-rotation on my Discman’s car cassette adapter well through ‘98.

As the market kicked into high gear in ‘96, the late Bradley Nowell perfectly captured the decadence of Wall Street on “Santeria” when he declares that he had a million dollars-- but he spent it all. I can only presume he was daytrading tech stocks on the tour bus. It’s too bad he didn’t live to see what the rest of the decade would bring. 

5. Radiohead OK Computer

Release date: May 21, 1997 1997 S&P 500 performance: +31%

It’s 1997. The market is streaking higher-- and we’re studying the Great Depression in my American history class. I knew from the background noise in my life that stocks were going higher. That was the extent of my market knowledge at age 16. But I was interested in how it all worked. 

So I asked my teacher if the markets could ever crash again like they did in 1929. She told me that couldn’t happen because of modern advancements. What a relief!

However, Radiohead knew something was amiss. OK Computer is a deep album. And I desperately wanted to be “deep”-- so I listened intently as Thom Yorke tore apart all the ridiculous excesses of the decade. He knew fitter, happier, more productive wouldn’t last forever. It’s only fitting that OK Computer is the last great rock album of the ‘90. 

What else was there to say?

Honorable mentions: 

Red Hot Chili Peppers Blood Sugar Sex Magik Green Day Dookie Rage Against the Machine Rage Against the Machine Oasis (What's the Story) Morning Glory?

—

Follow me on Twitter

The major averages still refuse to show their cards as we chop into summer. But there’s a trade that’s working right now that I really like. And the strength of these names on Monday tells me they could continue to perform well as many stocks lack momentum in either direction. 

Here’s the setup:

I’m looking at recent IPOs that were hot right out of the gate-- but gave back close to 100% of their early gains. That’s the first requirement. You have to have a popular new stock that posted significant gains, earned sweetheart status, then disappointed just about everyone. 

That’s where it gets interesting. Take a look at the recent performance of GoPro Inc. (NASDAQ:GPRO) and Alibaba (NYSE:BABA): 

Obviously, GoPro is way ahead of Alibaba in the comeback department. But just check out the striking similarities in these charts. Both formed small bases shortly after going public. Then, after an impressive run higher lasting several weeks, the slow grind lower brings the stock back near its starting point. There’s your reset. 

[Note: You want to look for proven performers with several months of price history when screening for these plays. Trying to catch an IPO falling knife that has never rallied (I’m looking at you, ETSY) is probably a terrible idea.]

In both cases, these low points coincided with a bump in bearish news stories, analyst downgrades, and plenty of negative sentiment reverberating throughout finance Twitter. 

Of course, these sentiment extremes near support provided a solid foundation for a reversal higher. Interestingly enough, both BABA and GPRO kicked off their respective rallies with a gap higher, marked by the blue arrows. I’m long both of these names from the gaps. 

In a market where it’s been a little difficult to find an edge, setups like these have offered a little refuge for traders who are willing expand their timeframes as these comeback moves develop. 

— Follow me on Twitter

For the past couple of weeks, every media outlet in the financial world has been trying to one-up the other with the zaniest Chinese stock market story possible.

My absolute favorite critique of the raging Chinese bull thus far is that these so-called traders are buying stock tip sheets on the streets of Shanghai for the equivalent of a couple of bucks. And some of these newer traders are *gasp* barely educated.

Here’s Bloomberg:

More than two thirds of new equity investors exited the education system by middle school — which in China means around the age of 15. More than 30 percent exited at age 12 or below. Household wealth for new investors is about half the level of existing investors.

Who said the peasants could try and get in on this rally? These people probably haven’t even had the chance to learn about Efficient Market Theory yet. 

Thankfully, we don’t have to deal with this kind of rabble trying to buy stocks here in the U.S. Instead, we have highly educated engineers who quit their jobs in the late 90s to daytrade tech stocks, dentists trying to flip houses for twice what they’re worth ten years later, and lawyers losing six-figures buying the Etsy IPO yesterday.

Here’s the reality of the situation:

China has entered a powerful bull market. Call it a mania. Call it a bubble. Call it whatever you want. They’re buying stocks hand over fist-- and no one knows when it’s going to end.

Instead of mocking the rally, let’s take an objective look at a 10-year chart of the Shanghai Composite. Note the massive, BRIC-induced boom of 2006-2007 that shot the index up 460%. Then look at the next six years:

After a short-lived recovery in early 2009, Chinese stocks just drifted lower. For years. It’s been decades since we’ve seen market stagnation like that here in the U.S. 

So why is it so surprising that the Shanghai has popped about 120% since it broke out of its big coil last year? Why are we so shocked to see an endless parade of new speculators from a nation of nearly 1.4 billion people just as the Chinese government lifts a few key trading restrictions? 

If the Shanghai doubled again over the next 12 months, would that really be the craziest thing to happen to world market over the past five years? Please. 

I’m not saying it’s going to happen. And to be clear, I’m not saying this boom will continue without (at the very least) some heartwrenching pullbacks. But it’s entirely possible that this monster continues to grow.  

So you have a choice.

You can sit around and smugly deride every limit-up move in Chinese stocks for the next month, 6 months, 3 years or however long this thing lasts.

Or you can admit your MBA doesn’t magically shield you from the emotional rollercoaster of investing-- and that you’re not smarter than the Chinese stock market. 

— Follow me on Twitter

Are we still in a bull market? 

No doubt it’s been tough out there. Divergences abound, stocks are grinding along, and plenty of legitimate bearish arguments continue to emerge almost every week. So I decided to break out the sharpie to help keep my head on straight. Should I hang this by the desk to help maintain my sanity as summer trading approaches?

Pull up a long-term chart of any stock that’s posted impressive returns over the past few years.

Looking back, it appears as if the gains just started piling up. But you know that’s not true. It’s all too easy to fantasize about the big profits-- while ignoring the big pullbacks that shook out so many investors along the way.

Hindsight is a bias you cannot escape. We think it’s easy to cash in on the trends pictured on the charts we pull up on our screens every day. And that’s where we run into trouble.

My friend Batnick posted some thoughts recently about the pain longer-term investors had to endure in order to reap their rewards. He notes that while the S&P Biotech Index ETF has risen 340% since 2006, the ETF has actually been in a 10% drawdown 46% of the time since 2006.

Don’t tell me you would have held XBI over the past nine years without so much as a bead of sweat dripping form your forehead. I’m just not buying it.

But that doesn’t mean you should ignore these longer-term themes altogether. It’s important to round out your shorter-term trades with some conviction ideas-- you just have to make sure to enter these plays with the correct mindset.

From experience, I can tell you that some of my most disappointing trades were stocks I bought with a long-term timeframe in mind, but no real plan or exit strategy to fall back on. Of course, I ended up with poorly-timed sells that caused me to either miss out on a much larger run or give back hard-fought gains.

That’s when I figured out that I’d need to come up with a better system for dealing with my bigger ideas. So to help combat your emotions and get you into the right stocks, here are some thoughts to keep in mind when developing your own system and planning your next long-term conviction trade:

Pick a viral theme. I want a big, well-known stock in a popular or upcoming industry for my longer-term idea. My trade needs to be easy to understand. I have to have a solid “elevator pitch” before it passes the test. If it would take longer than a short elevator ride to convince a fellow investor of my idea, I should scrap it. 

Forget about short-term moving averages. Don’t get hung up on selling your trade at the perfect moment. It’s never going to happen. All you need is a pre-defined exit signal to keep you from second-guessing yourself or making an emotional trade. And yes, that means you’ll have to endure a little pain along the way. Under Armour stock has significantly violated its 50-day moving average more than seven times since the beginning of 2013. Shares have risen from $22 to $78 over that period (split adjusted). Something closer to a 200-day moving average or other longer-term trendline is what you should consider instead. 

Buy-and-cry. I sometimes find myself pinching pennies for no good reason on longer term trades. Get over it and hit the buy button if your idea is breaking out. If a potential trade is up more than 5% on the day, one of the worst things you can do for a longer-term strategy is to put off buying. The best stocks aren’t going to sit around to wait for you to get in a couple of bucks lower.  If you have a system in place, it shouldn’t bother you if the trade isn’t in the green right away. 

That should get you started. And to sweeten the pot, here are a few conviction trade ideas I like right now. I even highlighted some of the bigger drawdowns on the charts for you.

SolarCity Corp. (NASDAQ:SCTY) 
 Theme: Solar power is quickly becoming a viable alternative energy; Elon Musk is the new Steve Jobs
 Gains since Jan. 1, 2013: 324%

Under Armour (NYSE:UA)
 Theme: Everyone now dresses like they’re going/have just gone to the gym 24/7
 Gains since Jan. 1, 2013: 218%

Cyber-Ark Software (NASDAQ:CYBR)
 Theme: Someone is trying to steal your identity while you’re reading this
 Gains since IPO: 116%

—

Follow me on Twitter

You’ve no doubt heard the old Wall Street adage that says stocks take the escalator up, and the elevator down. 

It’s true. Climbing the wall of worry takes time. But when they pull the rug, you better watch out. Selling happens fast. Sounds simple enough, right? 

However, what this old saw doesn’t mention is that stocks don’t usually take an unexpected dive from their highs. Instead, you’ll probably see a topping process as opposed to a single, obvious event.  

Tops-- whether we’re talking cyclical or secular ones-- are portrayed as bulls simply passing the baton to the bears. But we have to remember that we’re dealing with a battle of human emotions. In reality, a bullish investor isn’t going to turn bearish overnight. It’s a fight-- not an exchange. 

Changes in perception are extremely difficult and painful for most investors. And they happen in waves. Not every investor will flip from bullish to bearish at the same moment. That’s why we tend to see more rounded, uncertain tops that usually feature a couple of false breakdowns and failed rallies to new highs-- whether we’re talking about the major averages or an individual company or sector.  

With that in mind, I think it’s time to start talking about a potential top in biotech stocks. To clarify, I’m not interested in debating whether or not we’re in a biotech bubble (irrelevant) or if what we’re seeing right now is a potential short-term or long-term correction in the sector. Frankly, I don’t really care. If I’m trading, it doesn’t matter if biotechs drop 20% or 80%. Either way, I don’t want to own them when they’re going down.  

OK? Great. Let’s break down a chart:

In late March, we see a parabolic move complete with an exhaustion candle that finishes the day near its lows.

After heavy selling, we get a nice retest of the 50-day moving average that has been so reliable for the past six months. 

Then, failure to make new highs in late April on a low-volume rally.  

High-volume selling and the first meaningful drop below the 50-day moving average since October 2014.

Intraday retest of the 50-day moving average failed.

I don’t need a billion different indicators on my chart to see that this group is getting weaker by the day. Any way you slice it, this isn’t a space I want to be long right now. 

Taking it a step further, it’s important to note investors’ reactions if this pullback continues or worsens. This will give us clues as to where we are in the correction process.

Early stage (correction not yet generally accepted as anything more than a pullback):

“I hold the strongest stocks in this group-- they probably won’t be affected.”

“What we’re seeing here is some healthy profit-taking.”

“This is only a temporary setback.”

“These stocks need to blow off some steam anyway.”

Awareness stage (technical correction identified/confirmed):

“Drug X is a game changer. This stock will rebound quickly once investors come to their senses.”

“Company X is superior to 90% of the other stocks in this industry. Its products are flying off shelves and propelling huge growth.”

“Anyone selling now is crazy. I”m backing up the truck.”

Later stage (non-financial media has figured out these stocks are down big; biotech headline hits USA Today front page):

“The selling is way overdone.”

“Wake up people! This stock is cheap as hell. Have you seen its updated price-to-sales ratio?”

— Follow me on Twitter

It’s past curfew here in Baltimore. And I’m exhausted. 

I’m tired of watching the news. I’m tired of planning my day around protests and street closures. And I’m especially tired of watching out-of-town reporters trying to act comfortable as they stroll through West Baltimore to get their interviews.

But I’m not the only one (or thing) that’s tired. Stocks are dozing off after grazing new highs Monday. The Nasdaq has been especially drowsy this week, dropping more than 1.6% today. 

You don’t have to look too hard to see the exhaustion in the lines of Apple’s chart:

Tuesday’s post-earnings bearish engulfing candle tells the story here. That sets up a potential double-top for tech’s biggest cash cow heading toward the end of a tumultuous trading week.

But Apple’s not the only culprit. Plenty of other stocks are also starting to betray the bulls. In fact, one sector in particular might catch your eye. 

Here are some startling numbers: 

520 stocks listed on the Nasdaq are up at least 30% year-to-date.

Of these 30% gainers, 107 are down at least 10% this week

Out of these losers, 75 belong to the health care sector.

52 are listed as biotechs 

I wouldn’t be in any hurry to try and buy the dip on some of these lead balloons:

At the very least, we’re seeing strong rotation out of biotech's heading into May. Just to clarify, I’m not trying to call a top in this sector. The Biotech iShares are still up 10% year-to-date. But it’s important to note just how tired some of these outperformers have become over such a short timeframe. There’s no reason to try and catch these falling knives right now. 

— Follow me on Twitter

Here’s an alarming statistic: 

Texting while driving has caused teenage car accident deaths to double over the past decade.

That’s not hard to imagine, right? We’ve all seen the commercials. Texting while driving is an epidemic that’s killing our kids. 

Except there’s one problem—I fabricated this statistic. If we actually bothered to look it up, we would know that the number of teen drivers dying in car crashes dropped by more than half over the past 10 years. Safer cars and more restrictive licenses have contributed to the trend, according to a recent report from Reuters.

Sure, distracted driving is a problem for younger drivers. But the idea that texting is causing the car accident death toll to rise dramatically is a false narrative. And it’s so easy to believe because it fits right into how most of us see the world. Who hasn’t been cut off lately by someone messing with his phone?

So what are some of the lies we tell ourselves about the markets? Are we really looking at data objectively? Or are we twisting every piece of information we absorb through our own personal narrative filter?

Here’s one of those assumptions I’ve come across more and more lately:

“You can’t beat the market by chasing momentum”

Fair enough. If you put on a suit and tie and read this statement in front of a group of random investors, I’d bet none would argue with you.

However, this statement is completely false. Let’s break it down:

First off, I love how momentum strategies are often discredited simply by calling them “chasing”. It makes it sound unsophisticated. Only losers and simpletons chase stocks.

But guess what? Momentum is actually the best performing strategy you can employ—yet barely anyone does it. Most investors are too wrapped up in debating growth vs. value. Yet when it comes to performance, both growth and value trail momentum. And no, I didn’t just make this up. There’s data to back up that statement:

“Empirical data shows that momentum has indeed been a consistent long-term investment strategy,” John Hancock’s Frank Teixeira writes. “In fact, momentum factor returns have been stronger than those of either growth or value over the very long term, resulting in significant excess relative performance. Momentum averaged more than 3% in annual outperformance relative to the market from 1927 to 2014.”

Just look at all those growth and value funds.

Why is everyone pouring their hard-earned investing dollars into inferior strategies?

It’s because of their narrative filter.

It’s shockingly simple to force a growth or value strategy into your personal narrative. Growth is the easiest sell. It’s all about stories. The next Facebook. The next Apple. Who doesn’t want to own these ideas? And value appeals to our more rational emotions. I want to make money safely using a rigorous, academic approach. Again, how could you say no to that? The stocks that eventually outperform are the hidden, undervalued, unloved gems. It makes perfect sense.

But momentum? Buying the strongest stocks on the market and then just repeating this process over and over? C’mon. That sounds ridiculous. The whole idea of momentum investing is too simple. And nothing simple could possibly work in the cutthroat world of the stock market.

Except that’s not true, either. While momentum sounds simple enough, it’s not an easy strategy for most investors to employ. If you’re actually running any type of momentum strategy and rotating into the strongest stocks on the market at any given time, you’re buying a bunch of stocks most investors wouldn’t touch because at a glance, they look overextended.

Take a look at these three charts:

Here we have three stocks that have crushed the averages so far this year. But look at the highlighted candles. Those were your buy signals. Would you have forced yourself to buy these names as they surged higher? Hindsight shows us that they all offered stellar returns after these strong initial moves. But in the moment, most investors (and many traders) would have skipped over these stocks or attempted to wait for a pullback that never materialized.

It’s not as easy as it looks.

But by all means, keep chasing returns with those growth funds. I wouldn’t want to bust up your narrative.

— Follow me on Twitter

The Lilly Pulitzer release crashed Target’s website and caused hysteria at stores reminiscent of a Black Friday stampede. 

Common sense would say this is a good thing for Target stock. Sell more pink couch pillows, book more profit, shares go up. That’s Econ 101, right?

But the charts are telling a different story. With all of the positive news reverbarating around the pastel nightmare that is Lilly Pulitzer, Big Retail actually looks ready to roll over. So while the media gushes over Lilly Pulitzer’s big sellout, I’m seeing plenty of reasons to ditch your shares of Target. 

Take Walmart, Target’s bigger (and cheaper) sister. After a strong breakout late last year, Walmart stock has languished in 2015. It’s down by more than 8% so far this year:

Then there’s Home Depot. This stock has been an absolute beast. Over the past 12 months, shares are up nearly 50%. But right now, the home improvement king isn’t looking so hot:

The 50-day moving average has been a reliable bounce-zone for Home Depot over the past six months. But the stock closed below this mark after Friday’s selloff. And while it hinted at a possible rebound Monday, we remain solidly below support here. After getting stuck in a sideways range since late February and failing to hold the gap higher, I’d say this chart looks toppy.

That brings us back to Target. Yes, this stock has been an absolute beast lately. Target shares ramped higher into the holidays late last year and never looked back. But right now, I’m seeing signs that Target might be ready to crack:

Last week was a tough one for Target. Shares dropped by more than 4% from their peak. And while the stock continues to hold above its 50-day moving average, I’m not eagerly trying to buy this bounce. 

As we jump headfirst into earnings season, Target shares barely budged on the Lilly Pulitzer hype Monday. This looks like a classic “sell the news” situation. 

In fact, the entire sector looks ripe for a pullback. As a group, retail stocks have enjoyed a strong period of outperformance versus the S&P since late last year. Here’s a look at the S&P Retail Index vs. the S&P 500:

It was a good run, but it can’t last forever. I suspect to see traders rotate into other sectors for now.

—

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During the height of the East Coast/West Coast rap battles of the late 90s, Saturday Night Live parodied the chaos with a sketch featuring the Laid Back Neutral MC's. Hoping to avid the fate of Tupac and Biggie, the fictional duo released an album called The East Coast and the West Coast Are Both Great featuring hits like “Let’s Learn a Lesson from the Swiss”. 

The bit is worth a watch, if not just for the Sam Goody reference at the very end. That’s about as 90s as it gets, kids:

We can learn something from the Laid Back Neutral MC's, too. In our world of endless, quick-hitting market opinions, we’re exposed to plenty of shouting matches between bulls and bears. So far during this year’s chop-fest, neither have been right. And believe it or not, investors are starting to catch on.

According to the latest AAII Sentiment Survey, the neutral crew is growing. While bulls and bears have see-sawed back and forth, the percentage of investors with a neutral market view has ballooned to 5-year highs. Take a look:

I’m guessing the growing number of neutral stock market MC’s is a direct result of our aging bull market. Stocks are churning sideways this year-- giving investors plenty of time to stew in their own thoughts.

However, this neutral vibe isn't necessarily a bad thing. In fact, adopting a neutral market mindset can be beneficial-- especially in this market. If you’re not married to a particular camp, you can:

Reduce your position sizing 

Stay nimble and ready to execute a long or short trades on any significant bull or bear move

Keep from getting caught overexposed in longs or shorts if the market moves against you

“I’m retired” was Walter Deemer’s standard quip as Barry Ritholtz attempted to squeeze some nuggets of wisdom out of the legendary technician. 

Barry conducted a lengthy interview with Walt at a recent Market Technician’s Association event. And as usual, Deemer delivered plenty of funny, insightful, and thoughtful advice.

But when it comes down to how Deemer operated during his storied career with Merrill Lynch and Putnam, he always brings it back to the rules laid out by his mentor, Bob Farrell.

In his book Deemer on Technical Analysis (which is an excellent read, by the way), he lays out Farrell’s 10 rules-- plus an extra one from the man himself.

Even if you never look at another stock chart again in your life, these rules will “make you look at the market intellectually, not mechanically,” Deemer writes.

Most importantly, they are as true now as they were fifty years ago. [Charts and notes in italics are mine]

Paul Farrell’s 10 11 market rules to remember:

1. Markets tend to return to the mean over time.

2. Excesses in one direction will lead to an opposite excess in the other direction.

Hmmm. Where have we seen phenomenon recently? Perhaps this Alibaba chart will jog your memory:

3. There are no new eras-- excesses are never permanent.

4. Exponentially rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

Biotech, anyone? Sure, this epic rally might still have legs. But when it’s over, don’t expect these stocks to tread water. Parabolic moves don’t plateau.  

5. The public buys the most at a top and the least at a bottom.

6. Fear and greed are stronger than long-term resolve.

7. [Bull]... markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.

Breadth matters. It’s not a perfect timing tool-- but you shouldn’t go all-in on the long side when most stocks have already broken trend.

8. Bear markets have three stages-- sharp down, reflexive rebound, [and] a drawn-out fundamental downtrend.

DDD is a great example of a three-stage bear:

9. When the experts and forecasts agree-- something else is going to happen.

Don’t be a contrarian just to go against the grain. Look for sentiment extremes to gauge when it’s time to bet against the crowd. 

10. Bull markets are more fun than bear markets.

11. Though business conditions may change, corporations and securities may change, and financial institutions and regulations may change, human nature remains essentially the same.

We aren’t going to wake up tomorrow to a rational market. Emotions reign supreme-- whether stocks are moving up, down, or sideways. 

— follow me on twitter/stocktwits: @gregguenthner

How do you feel about the stock market right now? Bullish or bearish?

Not sure? Just slap a few more lines on that chart of yours. That should help clear things up. 

Or maybe it won’t. 

Late last week, I was in New York for the Market Technicians Association’s annual symposium. Every year a ton of talent packs the room for two straight days. 

It’s always a treat to see the best technical analysis brains in the business share some of their secrets. And this year, I took note of a major theme running throughout virtually every presentation: simplicity. 

That’s right. Most of the smartest guys in the room aren't cramming their charts full of studies and indicators. In fact, one presenter described his technical toolkit as “shockingly simple”. 

Here’s where it all really hit home: On the final afternoon, Tracy Knudsen from Lowry Research pulled up a slide with easily a hundred technical indicators listed. I’d be lying if I said I was even remotely familiar with half of them. 

“If just a few of these indicators worked, why would the list be this long?” she asked. “Are we really doing things any smarter?”

Everyone’s looking for the Holy Grail. And to find it, we think we need to concoct a stew of unreadable charts. But if we just take a step back, we quickly see that the market’s most powerful moves are undeniable-- even on the simplest of charts.

Take a look:

All I have here are one-year charts with performance relative to the S&P below. It’s that simple. I don’t even need to draw trendlines. Who wouldn’t want to own these stocks at some point over the past 12 months?

Perhaps more importantly, clean charts are a must if you’re trying to convey your trading ideas to non-technicians. Throw a complicated mess up on the screen at your next big meeting and I guarantee everyone’s eyes will glaze over. 

Simplifying your charts can help you refine your trading ideas as well. The next time you’re unsure about a trade, break the chart down into it’s most raw form. You might end up seeing something you missed before-- all because your judgement was clouded by a haze of unnecessary indicators. 

No matter what, there’s always a stock that somehow retains its popularity even as it incinerates millions of dollars. 

Alibaba (NYSE:BABA) is one of those stocks. Yes, traders had a chance to grab onto a piece of that 40%-plus move late last year. But ever since this name topped out in November, it’s been nothing but a painful ride lower. The gains are gone. And all we’re left with is false starts and lower prices. 

Each attempt to stay above the 20-day moving average has been met with more selling. So while this month’s action is encouraging, I’m not exactly sold that we’ve seen the bottom in BABA just yet:

Despite the poor performance over the past five months, it feels like BABA pops up in almost every conversation I have about the markets. It’s all over Twitter. Nearly 17 million shares exchange hands each day. We just can’t get enough of the “Amazon of China”. 

But maybe we’re fixated on the wrong stock. 

Instead of trying to catch the falling BABA knife, might I suggest taking a look at Baidu (NASDAQ:BIDU) -- the “Google of China”-- instead?

All the main ingredients are still there. You get your China play, complete with catchy comparison to an American tech giant. But this time, you actually get to buy a stock that’s enjoying a long-term uptrend.

Here’s a weekly look:

I love how BIDU respects the 50-week moving average. A solid test of support materialized earlier this month. That should give us the beginnings of a nice bounce here. 

If we zoom in to a  daily view, you can see how BIDU has taken back its 50-day moving average, finishing in the green during 3 of the past four sessions:

I’ll like this move even more if BIDU can take out $220. That should break this stock free of the downtrend that has trapped it since early November. 

When it comes down to it, there’s really no debate. What would you rather buy? A free-falling IPO with very little price history? Or a solid bounce off support from a stock that’s in a bigger uptrend?

No contest. It’s BIDU every time.