This Week’s Battle Plan
Last week I discussed the fact that a
short-term correction looked likely, but longer term I was in the
bull’s camp. On a very short term basis, we had VIX readings at
extremes, a market that shrugged off good news the previous Friday,
and other indicators saying complacency had set in. Monday afternoon
saw a healthy sell-off as expected, which followed through into
Wednesday morning’s trading. And then the market did what a healthy
market should do…it did a complete 180. The VIX opened Wednesday
morning at a 10-day high (signaling fear) and then quickly reversed.
This sentiment change was led by the NASDAQ and the SOX. It was as if
the good old days had returned. And by Wednesday night, we had
multiple Connors VIX Reversals (CVRs) buy signals on our Market
Bias page telling us that in fact that short-term sentiment had
changed, and we had a nearly 70% chance of rising over the next few
days. And the market did rise…it rose over 180 Dow points. And what
led the charge? The same groups that led Wednesday’s reversal — the
Semis and the Naz. The semis are now up 15% for the year and the
Nasdaq is already up 5.6% (the Dow and S&Ps are each up 2+%).
Last week’s swing reversal is heaven
for guys like me. The swings are fast and powerful, and when they
occur, the gains are nice (except you spend the weekend
second-guessing yourself as to why you did not have bigger
positions!).
Will these swings continue? I hope so, but one never knows. Markets
never do the same thing for sustained periods of time, and that’s why
yesterday’s heroes many times just remain yesterday’s heroes. The
market goes into a different trading mode and the game changes. The
momentum bull heroes of 1999 were replaced by the bear heroes of 2000
and early to mid 2001. And then in September 2001, the bulls again
replaced the bears as the heroes. This is what makes this game so
challenging on two fronts: first, to avoid (like the plague)
yesterday’s heroes, and second, to figure out for yourself what the
next move is going to be. Correctly anticipating this next move is the
secret of all great traders. And it’s a secret that takes years and
years to master.
As far as this market goes, so far in the first few days (just as it
has over the past four months) it’s telling us that the momentum game
is back. And if this is true, as goes the SOX and the Nasdaq, so goes
our market. Watch these markets closely. They have told us since
September where we are heading.
I’m in the Wrong Industry!
One of the things I have yet to figure out is how thousands of guys
can lose billions of dollars for two years in a row and still earn six
and seven figure salaries. And, at the same time, even though they
lost so much money, they become glorified by the press because they
“outperformed the market.” In the investment management
world, you lose money (but lose less than the market) you get a raise.
You come home and brag to your spouse about the good news. But as
traders, we are not granted the same opportunity. Imagine coming home
and telling your spouse the news: “Honey, great news, I
outperformed the market today.” (But, unlike our investment
manager friends, our story unfortunately doesn’t end there.) “The
bad news is that even though I outperformed the averages we don’t have
any money for the mortgage and the dog food.”
But these guys control the game. They
move stocks, and as Kevin Haggerty says, they leave trails. And
as Kevin has proven, when you read their moves, profits (potentially
big profits) many times follow.
Inside Their
Heads…
So today let’s get inside the heads of our mutual fund money
management friends. Most came into the year with healthy cash
positions. This means that after two years of losing money (and many
under-performing the averages), they are one week into the year and
are already lagging the averages. It’s now catch-up time (or no more
healthy salary). And if you’re sitting here today in their position,
you are looking to put your money to work…quickly! And what
do you buy when you’re in the hole playing catch up? Not utility and
food stocks. You buy momentum. You buy the leaders. I don’t
know if that happens immediately, but it will happen.
The leaders today, as we mentioned
above, are the SOX, the major Nasdaq stocks, the stocks on our Proprietary
Momentum List, and the industries on our Strongest
Sector Lists. These are the places where the short-term surges
will occur when these guys come in. And these are the stocks that you
should be looking for increases in volume and breakouts. Momentum
begets momentum. Always has, always will.
Trading The
Swings…
With that said, I’ll add one caveat to all this. Once these guys are
done buying (and who knows, it may be soon), we will not likely see
the one-way momentum surges of 1996, 1997 and 1999. The new cash
levels coming into this market are just not there. And this likely
means we will see sharp corrections and the nice swings I talked about
in the opening paragraph.
In summary, as goes the SOX, the Nasdaq, and the stocks on our Proprietary
Momentum List, so goes our market. Look at these names throughout
the day (or each night). This is today’s game, this is where the money
has been made since September, and this is where the money will likely
be made until proven otherwise.
TraderTalk
This week we will be launching our 1-2 times per week new workshop
session we’re calling “TraderTalk.” This Wednesday at 4:30
pm EST, I’ll be leading the workshop, teaching you how to short-term
time the market using my VIX indicators. Next week, Dave Landry will
be live to teach Swing Trading. The sessions will be interactive, as
you’ll be able to ask questions. If you are unable to make it, there
will be archives for you to learn from at your convenience. The link
to the TraderTalk workshops and the weekly schedule will be posted in
our What’s
New at TradingMarkets page.
Have a great week trading,
Larry
Connors and Brice Wightman
Larry Connors
is CEO and co-founder of TradingMarkets. He is also the author of four
books on trading, including Street
Smarts,
co-written with Linda Raschke, Connors
on Advanced Trading Strategies, and his latest release, Trading
Connors VIX Reversals.
Brice
Wightman is a Market Analyst at TradingMarkets.com.