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The break today in Lululemon (LULU) and yesterday’s break in Google (GOOG) reminded me to bring up our previous discussion of the “Super Seven.” Last year we introduced this concept to the MarketSmith community as a means to assist with market directional analysis. At that time we identified the strongest leaders in the long term uptrend (since 2009) and started using the action in those stocks to help clarify the action we were seeing in the overall market.
While GOOG was not on the list at that time, I lump it in this discussion now because it is one of the institutional favorites that has helped to keep confidence in the market as of late. Over the past year we have seen many of the Super Seven top, including: GMCR, NFLX, CMG, BIDU, PCLN. While I’m not ready to call a top in AAPL or LULU yet, today’s action brings them one step closer to breaking. Overall the action on leading stocks has been poor these past few weeks.
The recent break in leadings stocks is significant for several reasons. First you must recognize who is behind these large moves down. Institutional buying, sustained over several years, is what drove these large cap growth stocks to such impressive heights. Sensing the top might be in, we are now seeing the big money trying to get out of them.
This activity is also important for psychological reasons. These stocks are the best growth stocks of this cycle. Due to their impressive gains, they have been highly visible and are watched by everyone. The past success of these stocks has given investors confidence in the market. But when the stocks that are bolstering confidence in the market get taken out, market psychology shifts negative.
Finally, you have to go back to our studies of history’s strongest leading stocks. When you get a big price break around the stock’s peak, the majority of times, that stock has topped and will correct on average 72%. And when institutional investors get around to selling the highest quality leaders from the bull market cycle, the longer term uptrend is most likely over.
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since you introduced the super seven I really watched them closley, and I actually added three stocks to make them the super ten. I included ALXN, TSCO and ULTA. Especially ALXN had quite a break over the last two weeks.
Question: Scott if you consider the super ten the macroleaders do you also note down leaders of "micro"uptrends such as EQIX, PCLN, AAPL, PCYC and so on i.e. for the Q1 uptrend? It is interesting because if you do this you can see that from uptrend to uptrend less and less names of the super ten are participating. While it was AAPL, PCLN, ALXN and maybe MNST in Q1 now only AAPL and ALXN are left who at least tried to show strength in Q3.
Moreover I have a lot of those on my shorting watchlist as MNST, PCLN, CMG, BIDU are all at the edge of breaking down. I am just to inexperienced in order to hit the short selling sweet spot so I need some further confirmation on the downside before I consider playing them.
I also recall a sentence WON wrote in his book: "when the market wants you to operate outside your normal methods it's telling you something is changing/not right".
And right now the market wants me to play the housing recovery by buying into stocks that do show huge earnings but often lack other metrics by a large margin! Making it look almost right... signalling a red flag for me.
I have a screen which I created after reading: MONSTER STOCKS by Roppel and it produces all the Stocks of the super seven and some more automatically. Right now it yields 26 stocks.
From those 26 only 3 are in the TOP20 groups and only 8 are in the TOP50.
My conclusion is that we are so late in the cycle that it is just very difficult to make money buy buying the usual candidates.
Just check ou Cabelas CAB, it's industry is quite weak and it some kind of a lone ranger however it has extremely strong institutional sponsorship and is just climbing (was one of the early breakouts of the recent advance).
So the typical growth names are there and buyable however just don't expect them to be in the TOP20 of industrygroups in other words while there are no strong group moves the powerful growths names with institutional sponserhip are still there, just not as obvious as you would expect after reading the book.
So in my conclusion it is very very hard to gain an edge right now as the situtation is complicated and difficult to play.
- The housing recovery is a strong playable group move with a lot of stocks showing huge earnings and financials are strong, which is always a good sign and might be enough to proper a uptrend. However it is extremely difficult to find low risk/reward entry points (right now there might be one).
-However Techs are really really weak since QE3 and IMF QE
-Moreover a lot of former BIG STOCKS are close to being in a shorting sweet spot.
One must have tremendous experience to sucessfully play the current market as it is very challenging psychologically in my opinion.
It's just a complicated mix of maybe positioning oneself to take advantage of the housing recovery, trying to stick to position's were one has a cushion and considering a potential short selling sweet spot.
==> Those circumstances are what might move you to the hyperspeed lane if your destination is the realm of overtrading.
This is definately too much for me to handle (I started investing in August 2011) so I'll might just go to cash and sit it out.
@theis-martin: I don’t really follow the micro uptrend leaders like you state. However I do agree with your observation that fewer and fewer names are participating and that we are late in the cycle. Both facts will make it difficult to make money.
Cash is a nice position. I really like the CAN SLIM model. I made a nice profit in the first part of the year. Since April, it has kept me in cash, the most I have been invested is 40%. During periods like now, where the risk/reward is not in my favor I am 100% cash - been so for 2 weeks. While, I love making more money, I will be satisfied with my returns for the year even if I am flat for the rest of the year.
I do concur, the housing is the one industry that has been strong and tempting to buy in. It is similiar to the spring 2008 rally in Energy - recall the $140/barrel oil prices and it's subsequent decline - in the middle of the 2008 bear market. With a number of marginal energy stocks making good runs. I made some money, but the stocks lacked strong institutional support. They had good volume, but I beleive it was more from momentum traders than top performing mutual funds. (Look at a stocks sponsorship rating and which funds are making new positions). As the energy bubble burst the stocks quickly retreated. As such, I will avoid the current fads and stick with strong stocks breaking out of sound bases - even if it keeps me in cash. Even when the market returns to a market in uptrend (which it will), I will start with a target of being 20% invested until it proves worthy of more of my money. Until then, cash has kept me from loses.
p.s. Some of my favorite housing stocks that am watching are: SHW, ASPS and LL. All would be consider B list stocks for various reasons.
I agree that the market is far away from a all clear signal so I will not make any fresh money buys in this enviroment (this includes breakouts in the housing sector). The market is basically a falling knife right now.
And the list of the early leader acting constructivly becomes smaller and smaller.
I just went over my buys the last quater and did some serious postanalysis. And I must admit that I played it really poor. I bought a couple fundamentally strong stocks with very solid institutional support at the proper buypoint. And after 3 weeks I just sold those as they didn't move up "fast enough" and bought some high beta hot stocks instead. Of course that didn't worked out well... impatience just doesn't pay off.
So I learned my lesson. Had I just sit tight in those (and they all acted perfectly just didn't move fast) I wouldn't have been tempted to buy other later breakouts which kind of put me in overtrading mode.
If you make mistakes early in a uptrend there is little chance to make up for it.
They stocks I owned were REGN, ESRX and FLT. However I bought a fourth one at the proper buypoint and that one actually is quite a winner and so I'll try to sit through this correction. Actually it is just insane how good that stock acts.
The pieces slowly fall into place. I assume that I picked to perfect time to start in the stock market (August 2011) as this difficult time is the perfect learning enviroment for this method :-). As timing and discipline is the key, took me almost half a year until I was ok with not buying everything that breaking out on the first rally attempt off the lows :-D. I was so afraid to miss the opportunity that I overtrated like crazy.
Just love watching those prices move up and down... since I started in last August I now hate the weekend and love Mondays :-).
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