Chicken Little Update

Random Thoughts

Back in late January when the market began to lose momentum, the bears came out of the woodwork. Like Chicken Little, they proclaimed that the sky was falling. And, the market did sell off a bit–from peak to trough, nearly 6%. This is nothing to sneeze at but it did come right back. The sky did not fall.

Will it always come right back? No. However, as you can see, big picture predictions can be dangerous. Predict early and often is the mantra of many of gurus. Eventually, they will get it right and proclaim greatness. In the meantime, you can lose a lot of money waiting on “eventually.”

In a recent chart show, I showed that even if you had a crystal ball that would have told you the market would drop 6%, you would have been better off letting the market take you out vs. exiting stocks. Updating those positions which were open prior to the market peak (January 15th ), as of Friday (02/21/14) we had one long stop out at a gain, one lose 9%, one gain 4%, one gain 28%, and one gain 30%. Of course, things don’t always go so well, but as you can see, it is usually not a good idea to bailout on everything as soon as conditions become questionable. Rather, let the market decide what positions you should keep via stops.

Okay Big Dave, the slide is over and we’re nearing new highs, is this the all-clear? Well, not exactly, there’s always something to worry about. The market is still overbought and has the “V” shaped recovery look. The good news is, the longer it can hold near new highs, the better as the overbought condition gets digested. Said alternatively, some basing action would certainly help.

I’m not a big fan of buying into an overbought market. So, now is the time to take things on a setup by setup basis. If you really like a setup, then take it. Just make sure you think you have something that you think is so great that it can continue higher even if the market does not. Pick the best and leave the rest.

Let’s look at the scoreboard. The Ps and Quack started strong but ended weak, losing a smidge on the day. The good news is that the broad based Rusty was able to hang on to nearly a 1/3% gain. So, overall, most stocks actually ended higher.

Drugs, led by Biotech, continued to bang out new highs.

The Transports had a small rally. Although they still look questionable over the intermediate-term, they are fairly close to their old highs. One big up day here and they are back at new highs.

The Semis backed off a bit but so far, their recent breakout remains intact.

Software gave up some of its gains intra-day but did manage to close at new highs.

Gold and Silver ended flat but I still think the mother-of-all bottoms remains in place here. Write that down.

As you would imagine, there are still a lot of areas that have the “V” shaped appearance like the overall market. Some, like Banks and Manufacturing, never did make it all the way back to their prior highs.

So, what do we do? I think we are in a one day at a time of environment. I know, I pretty much say this every day but this time I mean it. For the most part, let things shake out and don’t make any big picture predictions. Again, if you really really like a setup, then take it. If not, then pass. As usual, honor your stops on existing positions. This allows the market to decide what stocks you should keep and what stocks you should toss.

Futures are firm pre-market.

Best of luck with your trading today!

Dave