Europe...it's that pimple that won't go away. This is the 3rd spring/summer in row now whereby problems with PIIGS are spooking the market. Markets have been reeling primarily on fears of what seems to be the likelihood of a Greece exit from the euro and the threat of broader european destabilization it brings with it . We had these same fears last year but Greece was able to secure bailout funds. This time there's a lot more political turmoil in Greece and the ECB has been pulling the plug on some Greek banks it believes are insolvent, thus signaling a Greece exit could be next. So, is the market's decline due these events justified? To some degree yes. Remember, the market had a blistering run from November to April and was on pace to rise a practically impossible 50% for the year at the recent peak. Something.... anything would have eventually caused things to cool down and these Greece fears are a good excuse as any. But now with the SPX at 1300, up only 3% YTD, it's no longer "ahead of itself" as it's on pace for about an 8% gain for the year and that certainty doable.
On the sentiment front there's good and bad news. The good news is that the bull's "fuel tank" is quite full. If you look at the last time the market was at 1300 in late January, AAII sentiment was 2:1 bulls vs bears, about 85% of stocks in the SPX were trading above their 200 DMA and the 50 DMA, while the 10 DMA of the put/call ratio was about 0.85....the tank was closer to empty than full. Now, with the market back at 1300 again, it's a totally different set of stats. AAII sentiment is 2:1 bears vs bulls, 40% of stocks in the SPX are trading above their 200 DMA , 14% are trading above their 50 DMA and the 10 DMA of the put/call ratio is at 1.18. The market is as oversold as it was near the depths of the flash crash in 2010. It did get more oversold during the depths of last year's decline though, but the point here is that the market is now sufficiently oversold to build the foundation for a very big rally to new highs...if that's what in the cards.
Now for the the bad news. The downside momentum has been decidedly nasty and with the market closing at the low of the day on Friday, it indicates that either the downside is not over yet or that quite a bit of base building will be required if at best case we have seen the worst. Next, there is somewhat of a lack of panic in the VIX. Also, Rydex and NAAIM sentiment is still not bearish enough especially Rydex sentiment. I suspect this will change very soon but until it does, they remain important holdouts.
Bottom line: Most of the damage has probably been done and there's enough gas in the tank for a massive rally once the market finds it's bottom, but with the market closing right at the low of this "correction" you have to respect the likelihood of at least a little more downside. Having said that though, the market is very ST oversold and a big bounce can happen any day now. We could be in situation similar to late May of 2010 or early August of 2011 whereby the market was close to making the first of several bottoming attempts. Those were solid LT buying opps but you had to go through the ringer several more weeks which included moderate new lows before you were rewarded. So on that note, if you don't believe the end of world is forthcoming due to Greek default/exit, get your shopping bags ready and start picking away at LT buys. However, you have to be prepared and willing to endure the potentially large knee jerk gap down that would likely take place should Greece default/exit.
I personally had a great week last week after several weeks of nothingness with tends to be the case with me given my affinity for small cap names. I was going to write a post soon about how I was struggling to find my grove this year but then my largest holding by far hwo.to, had a huge couple of days starting right on my birthday to boot! I talked about the stock here before. They recently announced blowout earnings and initiated a substantial monthly dividend for the first time. So far every year since I've been trading/investing full time, I've been able to identify 1 or 2 stocks that have done really well, powering my performance. You always wish you had more invested when you catch a big winner but this time though, keeping with my "brass balls" resolution for this year, I took 25% position in the stock before it had this big run. 25% is the absolute maximum I would ever allocate to one single stock and I would only do so if my conviction was very high and it was. A lot of people might think that a 25% position in any one stock is too aggressive but here's what I say...I'm not playing this game just to get mediocre results. I want to make big money and that means making the big bets if and when the great opportunities present themselves. At the same time though, I realize there's a fine line between being courageous and being reckless which is why I limit my convictions to a 25% maximum bet on one stock and 35% maximum sector exposure, for if I get it wrong big I'll be hurt but not wiped out or badly crippled. If I ever make such a concentrated bet though, all the ducks have to be lined up.
Now that I talked about hwo.to and all this "conviction" bullshit, watch it tank next week to humble me. Well, it would not surprise me to see at least some profit taking after a 50% jump in 2 days but like Livermore preached "be right and sit tight". I was right about hwo.to and so now I will sit tight not out of greed but because the stock is still quite undervalued in my book and so should eventually work higher. If the stock pops another 25-30 cents early next week though, I may do a little trimming and try to trade around the bulk of the position.
Oh ya...I forgot to talk about facebook....the biggest IPO in recent years...I couldn't give a rat's ass about it. First of all I almost always stay away from IPOs because they tend to be overpriced. The only one I liked in recent years was Lulu Lemon and if not for the financial collapse in 2008, that one would have been like Google's IPO which took off and never looked back. Lulu is now miles above it's IPO price. I read once a stat that said something like the majority of IPOs will trade below their opening price 6-12 months after they debut...that seems to be true based on my experience.
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