Majority of stocks above 10dma, S&P 500 moderately overbought - it's like a broken record. How long can this go on, and what's next?
A long time, and who knows! I think the conditions remain ripe for a rally, but a pullback could come out of the blue. They usually do after a rally like this, so prepare for it, at least emotionally. I can tell you this - the bid underneath the market is absolutely massive now, so I wouldn't worry too much about a correction exceeding 5%. More likely it would be 2.5% - something that would eat into the YTD gains but not by too much.
As far as the "when" issue, I am expecting a lot of stocks to hit black 1 in mid-March to early April. It's at this point that I will become a bit more concerned about the need to pull back a bit. With that said, the market has been highly rotational. For example, Energy was pretty weak relative to other sectors, while Tech and Consumer Discretionary were relatively strong. With what's going on in the Mideast, I could see a continuation of the recent shift in leadership towards Energy accelerating. So, some sectors might see sharper pullbacks than others. XLK (Tech), which is influenced by AAPL (but many other stocks are doing better), sits 8% above its 50dma, while the whole market is 5%. For the market to properly correct, the 10dma needs only return to the 50dma.
Looking at the dynamics, a move to the 50dma of the 10dma will depend upon where the overall market goes over the next month. We can project the 50dma of SPY to April 8th or so, which is the time I am expecting a pullback to take place (+/- 2 weeks) - it should be about 133-137 (currently 130.2 now), assuming the market sits here or rallies quickly to 140 and stays there. To the extent we go much higher or get there faster, then we will have to pullback. If we keep grinding (the market is only up a bit since the close on Friday after payroll (136.88 vs. 134.54 - that's 1% per week), we can get away with a very modest pullback to reset the rally. A surge (like AAPL endured) would likely trigger a steeper pullback (still, though, only 5%, 7% worst-case).
I honestly don't know how it plays out, and maybe we stay a black 1 on the overall market for more than 13 weeks. IT'S VERY RARE. I have been tracking it for more than a decade. Individual stocks can prove to be exceptions, but the whole market not so much. So, maybe I sound a bit scatter-brained on this, but I am not ruling out a surge here before the pullback. We aren't so overbought that it can't extend another 5% or so. Then, everyone looking to buy the dip will end up paying today's price or even more. What would be extreme? If SPY were to print 143 very quickly, it would generate a 1.5 overbought, which would be the highest level in more than a decade.
All I intend to do is to do what I do: Gauge the individual stocks, watching for being excessively overbought or overextended (or overvalued!). I will not be doing anything in the models to try to play a 2.5-5% pullback by raising cash (10% cash times 5% is just 0.5% of the portfolio - If I sold CHS to do that before the report, I would have missed 0.8% on just 5% cash), though I may end up rotating into different names/sectors as market conditions change. As it is now, all of our stocks in the models offer at least 20% to my targets (and I am thinking my targets may be too conservative in some cases). If the market were expensive, then I would be a bit more concerned about the cautious technical situation developing (of being overbought with a month to go before the whole market goes "black 1"). Rather than selling or buying puts to protect, selling calls is probably the best way to play this situation. Maybe at about 140 on SPY to sell some 142 April calls???
OK, enough market talk. Looking at the watchlist ( Download Watchlist022412), 61 stocks closed above the 10dma - not too extreme. There was some degradation on a few names in terms of the technical view (in red), but some improvement too (green). I changed MSM to red because it moved to black 1 and offers just 14% to my target. For those inclined to play ISRG, MSM or ZINC from the short side, good luck! I put them in red because I would sell if I owned - not sure I would short outright. There might be some options-related strategies to employ. Note that none of these are more than a unit overbought.
10% Movers: FIRE was on fire - I didn't even bother to update on that one. Sadly, I never acted on that one after I added it in July to the watchlist. I listened to the call and was somewhat concerned about the high federal government exposure. Well, it wasn't a problem. This is a cybersecurity software company with a better mousetrap and great management. I raised my target after their blowout report to a level below the current trading price - 37 (based on 35PE plus cash - maybe too conservative). It's 1.64 units overbought now. Bet those shorts (22% of float) aren't happy with that 22.6% pop last week. CHS rose almost 19% - it's a hold here in my view, as I shared after they reported. Best guess is that it tests the 16.50 old high. I am playing this like AKAM, which got the "second surge". ALGT fell 12.5% on fuel cost concerns. I had to cut my target a bit, but it still offers 30% over the next year. It is -.86 oversold. I have my eye on this one! INT reported - didn't fall 10% for the week (7.6%), but it was a classic black 1 reaction. The stock will likely do some work in the mid 40s to consolidate its move.
I found a new name this week - Envestnet (ENV) that looks very promising (removed ESRX). I have a preliminary 19 target, so it's actually one of our more attractive names potentially (25PE plus cash -growing rapidly). I like what I see, but I need to spend some more time. I tend to sometimes move fast with a name not on the watchlist, but it's typically one that I have followed previously (like AVX). ENV is 1.04 overbought. Other names offering 35% or more include RIMG, IRBT and ZMH still as well as ASTE (higher target due to higher earnings), SKX, and MIDD (higher target after further deep review).
In addition to ENV, I am considering IRBT (-.92 oversold), MIDD (.4 overbought) and perhaps MASI (.53 overbought) - too bad it popped, but it still looks interesting (31% projected return). Stocks that I might consider eliminating in Top 20 to make room would be (in no special order): CHS (not likely, as I expect near-term momentum), DRIV, ESL, KBALB, SCVL, SMCI and TECD. Of these, DRIV is the only stock > 40%. I would have to say KBALB is the top of the list, with the balance as "sell on strength" possibilities. Don't get me wrong, though, I like these stocks and am only thinking about sources of funds if I decide I really like ENV or IRBT most likely (as MIDD and MASI are expected to return similar to the sell candidates). If the stocks were overbought or moving to black 1, that would make it more likely. Hence, you can see the KBALB issue. I need to think hard about TECD into earnings this week - looks like a trim at a minimum now that it is a black 1. It's not overbought though, and my target of 77.5 is actually pretty conservative (12.5 PE with no credit for cash). My best guess (as of Saturday morning about 4 hours into a more extensive review than normal) is that I wait until later this week to act. I will be trimming CHS, though, from CG/B due to its size. In that model, I care more about potential downside risk relative to possible return.
Before we look at the positions in the models ( Download Positionwatch022412), SPY is actually LESS overbought as the market has slowed its ascent. This is because the moving averages that go into the calculation are rising faster than the stock price. SPY is .95 overbought, while IWM is "just" 0.89. Our typical stock is .6 at the median. Looking at the list, none are extremely overbought (>2), but two are moderately overbought (>1). On the oversold names, which are few and far between, CRR improved from extreme to just close to extreme.
We have a few earnings reports this week, including TECD on Tuesday and DGI on Wednesday (fingers crossed there). ESL reports on Thursday. PLPC doesn't host a call, but it should be reporting soon too. On the Watchlist, LOW reports Monday - boy did I eject that one prematurely. At this point, it's a little expensive, but still cheap to HD. CPRT reports Tuesday. On Thursday, MW and MIDD (not announced yet) report. I am looking for MIDD to pop, for those who care. I might put a ST Trade on.
