“When I went into the accounts more closely, I found I had the unenviable distinction of coming out of the greatest bull market in history with a lot of experience, a great amount of knowledge, much more confidence – and a net loss of $889.”
— Nicholas Darvas, How I Made $2,000,000 In The Stock Market
Last week, shares continued their follow-through out of the triangular pattern mentioned in previous reports. The only pullback, if it can be called that, was Tuesday’s hesitation. Otherwise, volume has not been strong on this descent.
The backdrop worsened last week, as market participants went about the task of preparing for one or more members to leave the Eurozone, or perhaps its break-up entirely. Specifically, European bond auctions, including that of Germany, fared poorly.
This darkening picture brightened with the strong holiday sales rung up in US stores over the holiday weekend. As mentioned last week, at some point the Euro-situation will fade in prominence and be supplanted by domestic growth prospects. When this changing of the guard will transpire is anyone’s guess. The US economy may not be gangbusters, and it may not be generating lots of jobs, but the fact is that corporate profits are increasing amid the slow-growth environment. This is the main reason why stocks are owned.
Among the names, it is clear which of the glamours are holding up better than others, and may be watched for leadership potential on the next advance. Conversely, it is also evident which are leading the way on the downside in this decline, these representing better short-sale candidates once the market stages a pullback longer than last week’s one-day stall on Tuesday.
Golar LNG (GLNG) may act better than any of the glamours. Also holding up better than most are Petsmart (PETM), Starbucks (SBUX), Dollar Tree (DLTR), Under Armour (UA), Intuitive Surgical (ISGR), Ulta Salon (ULTA), and Tractor Supply (TSCO).
In terms of names that might be suitable short-sale candidates, those that 1) peaked prior to the Oct. 27 top in the major averages, 2) have since underperformed the S&P, and 3) are showing clear institutional selling, represent potential candidates. Apple (AAPL), Amazon.com (AMZN), Cerner (CERN), and Baidu (BIDU) are four that meet these criteria.
A few other former leaders that meet the three criteria outlined above for a short candidate are Cash America International (CSH, in the 49-50 area of the last swing low of Oct. 20 at 49.26) and Accretive Health (AH, did not rally on last Tuesday’s stall in the Nasdaq, losing 4.6%; sits just above prior support, needs to pull back before offering attractive entry).
In periods of general market weakness, choosing the ETFs that hold the most potential for downward revaluation boils down to choosing the “beta babies,” those indices which possess more volatility in both up and down markets than the average US stock (S&P 500).
For this, we would look at small-capitalization and emerging markets ETFs, meaning inverse ETFs such as Proshares Ultrashort Russell 2000 (TWM) and Proshares Ultrashort MSCI Emerging Markets (EEV), both of which are levered 2x the unlevered underlying index. For those not wishing to use leverage, one-half of a normal-sized position could be allocated to one of these. Like the rest of the market, these are extended in price above their most recent support areas and thus do not offer attractive entry at present.
Short-selling individual stocks, or holding inverse ETFs, is a very different animal from long-only speculation. This is because price tends to decline more rapidly than it tends to rise, which means one’s timing must be more precise when shorting or holding inverse ETFs. And whereas price objectives when going long a growth stock in a bull market can be quite substantial, the short side generally offers less potential reward than the long side.
In summation, the major averages are extended in price to the downside along with most individual titles, making either long or short entry unattractive. For the long-only speculator, cash is king. Above all else, a flexible and open-minded approach is favored, so that strategy and tactics can reflect market reality and technical developments as they occur, not personal opinion, ours or anyone else’s.