Stock Market Update: Monday's Flawed Rally, Which Sectors Are Hot?

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Market Update: Monday's Flawed Rally, Which Sectors Are Hot?
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Trade Updates: FormFactor (FORM), Quicksilver (ZQK), WebMD (WBMD)

Market Update: Monday's Flawed Rally, Which Sectors Are Hot?

Before anybody gets giddy about yesterday's 1.7% rally that unwound a chunk of last week's losses, let me burst your bubble... it wasn't nearly as healthy as it may have appeared to be on paper.

Yes, stocks closed much higher yesterday, but there were very few people buying them. In fact, it was the lowest volume day since August 13th. It's going to require a much bigger following than that if the market is going to stage a rebound here and stave off a correction.

Though the end of today's session is still hours away, the session-so-far volume has been bearish, and a little heavier than yesterday's. In other words (and factoring in last week's hints) I'm still expecting stocks to move more than a little lower before they move significantly higher again.

I'll detail these thoughts in the blog later this week though, as it's not what I wanted to focus on for now.

Take a look at the nearby chart. It compares the percentage gains for each major sector since the March low. There's nothing really surprising about it - financials led the way, while utilities and telecom were dragging the bottom. I think we all knew in the back of our heads what the basic numbers were, but a visualization such as this one really adds some perspective.

I know what you're thinking...... "Great, but what do I do with this information now?"

There are two diametrically opposite interpretations of this information. One is that the trends in place will remain in place... the leaders will remain the leaders. The other interpretation is that change is inherent... what the market hated yesterday it'll love tomorrow. The fancy term is 'sector rotation'.

I think both interpretations have their merit, though I'll confess I'm more of a rotation guy than a pure trend-follower. I reconcile the two, however, by adding other layers of analysis (technical, fundamental, and common sense).

For instance, while I still firmly believe the financial sector has the most room to recover, I also know double-digit disparities between the best and worst sectors just don't last forever. So, I'm not really interested in adding new financial stocks to any portfolio right now; I'll wait for some of the gap to be closed.

I also like the visual aspect of this chart as it lets me spot emerging momentum.... like the kind we've seen from energy stocks and cyclical stocks over the last month or so. You can't see it at first glance, but a closer inspection of the chart (which is admittedly easier with my bigger version) indicates those two sectors are starting to perform much better than the rest. Perhaps we should adopt a corresponding bias for those two sectors.

You may see something else in the image - I hope you do. No matter what you do with it though, there's a ton of great information in that tiny chart.

From the Community

Trade Updates

Though we don't have any new trade entries for today, that doesn't mean we can avoid scrutinizing our open trades.... and perhaps carve out the ones that just aren't working. Here's a closer look at the most pressing positions.

FormFactor Inc. (FORM)

Though we're in the black with this short trade, FormFactor has moved lower a little slower than I expected. That has given a rising support line some time to make its way closer to where shares are trading now; I have to wonder if potential buyers are seeing the same thing and are prepping an entry.

We're not there yet though, and until it happens I have to assume the trend is indeed my friend. Besides, it's not the upper support line (now) I'm worried about. The lower one is the one I think will ultimately halt the current downtrend. It's at $20.44 right now, so there's still room for FORM to move lower.

Note the bulls made an effort to recover right after we entered this short, but FormFactor ended up closing at a new low close yesterday anyway. The momentum is still very much in our favor.

EDAP TMS SA (EDAP)

Another of our short trades, EDAP was entered on the basis of a wedge formation that has since turned into a consolidation zone. We're still hovering around break-even levels, so no big deal... it's just a waiting game now.

The sideways trading range - mostly between $3.74 and $4.83 - is marked on our chart (as is the original triangle shape). The directionless drift to the right is made even less interesting by minimal volume from both sides of the table.

Since we're already in the position, and we're not losing ground, I'm inclined to stick with it for the time being just because we need to keep some short/bearish exposure. I have a feeling that the horizontal support sand resistance lines that are now in place will be a major factor in this trade's future though.

Quicksilver Inc. (ZQK)

Quicksilver was one of our hottest trades two weeks ago, up about 28% at the time. Then a sharp pullback erased the bulk of that gain.

Something interesting happened yesterday though... a support line that was still in question ended up halting the decline, and possibly restarting the bigger uptrend. The line is marked on our chart, in blue.

So far it's nothing to rest easy about, as the volume behind the modest gain was weak, and ZQK had the benefit of a bullish market tide helping it move higher. Nevertheless, we found support exactly when we needed it.

WebMD Health Corp. (WBMD)

Looks like my bearish worries for our long position on WebMD were unmerited; the stock's back into its bullish groove.

A couple of weeks ago I mentioned WBMD had for the first time since our June 18th entry made a string of lower highs. Though not the end of the world since we were still seeing higher lows, it's always a concern when any trade's momentum wanes.

Good news... the support line held up, and the new resistance line cracked. Though it's still a slow grind higher, we're once again making bullish progress on decent volume.

Grupo Simec S.A.B. de C.V. (SIM)

I seem to recall a few weeks ago I was bragging on how well Grupo Simec was progressing.... quietly, and uneventfully. Maybe I jinxed it by saying anything at all - SIM just stopped its pattern of higher highs and higher lows, and now seems to be forming a sideways range. Could it be the beginning of a bearish range?

The resistance side of the zone is around $8.83, and has been tested twice in the last month. The support side of the range is around $7.50, and it too has been tested twice in the last month.

It's no big deal yet, especially considering the longer-term, rising support line is en route and should be in play within a week or so. If SIM can just hold on until then and avoid making a lower low, it would stave off a number of potential problems here.

That's it for today, but don't forget to check out the website - new stuff is added daily.

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