“The trader who tries to blame his losses on external events will never learn from his mistakes. For a trader, rationalization is a guaranteed road to ultimate failure.”
— Victor Sperandeo
An oversold market was given no reprieve Tuesday (7), as participants reacted to Mr. B’s downbeat tone by pinning shares to the mat with another late-day move toward the exits.
An oversold market that fails to bounce is doing the unexpected, and the unexpected is always more telling than otherwise. Overall, activity has not been high on the down days. Once a decline exceeds 6% or 8% or so, we prefer to see volume pick up as a means of reaching a climax by increasing the fear quotient.
This is the way a good bottom is often formed; by sellers, not buyers. At this point, complacency still appears high, but as we know, this can change quickly, in a matter of days.
The real concern is something that is not talked about much. It has to do with a Federal Reserve that has thrown everything at the problem. And still housing goes into a double-dip of its own. Serious stuff, indeed. There was a brief scare in ’02 when the word “deflation” began to be found on people’s lips. This lasted all of two months. And the same thing happened in ’08 for a brief stretch. In each case, the economy subsequently picked up, not unlike a gust of wind might lift a can off the ground and blow it down the road – just when it appeared as though the can might be stuck to the ground.
What we refer to is Japan. The Lost Two Decades.
Among the names, Polycom (PLCM) with its estimates of 45%/27% in ’11/’12, its RS line preceding price onto hew-high turf, its well-formed five-week base, its well-performing networking industry group, its solid intermediate-term accumulation, its respectable earnings stability, its recent bounce off the 50-day, its earnings growth acceleration over at least the past five quarters, and its exceptionally steady revenue growth of 28%, 27%, 27%, and 25% over the past four quarters, respectively, could be taken above the 4/28 high of 61.70, but only on strong volume, given the soggy climate overall.
Valeant Pharmaceuticals (VRX), with its estimates of 61%/19% for ’11/’12, its extreme group RS rating, its strong intermediate-term accumulation, its rising institutional sponsorship over at least the past three quarters, its well-formed nine-week base, its respect of the 50-day, its RS of 99, and its RS line preceding price into new-high ground, could be considered for a formal takeout of the 4/11 high of 55.
Illumina (ILMN), with its estimates of 42%/29% for ’11/’12, its rising estimate revisions, its strong industry group, its good accumulation, its rising sponsorship over the past few quarters, its quasi-ascending base, its ability to respect the 50-day over the past two weeks, could be considered for a formal takeout of the 5/13 high of 76.81.
Aggressive speculators may wish to use iShares Silver Trust’s (SLV) 5/31 high of 37.72 to enter a position in silver. The Gil Morales’ rule of “buy it when it’s quiet” as it relates to gold, is, we believe, the way to play silver. The truly aggressive operator may consider the same sort of entry in Proshares Ultra Silver (AGQ), which may well be the most volatile ETF extant.
In summation, this remains a time to keep most of one’s powder dry. Given the ominous backdrop, and its hint of post-’89 Japan-style meltdown, market participants may begin to increasingly realize that the real risk is falling prices, not an inflationary spiral. Liquid glamours like Baidu (BIDU), Amazon.com (AMZN), and the It stock (AAPL) are being offed by institutions, yet this could represent normal, late-cycle rotation, and nothing more ominous. A number of the current cycle’s speculative growth stock glamours hold up well. These should be monitored in case the averages firm up. The aggressive momentum player may wish to take one or more of these listed above, but only on confirming volume, given the backdrop.