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Avoid Exuberance After Strong Start to 2013

John Darsie and Mike Lee
Jan 7, 2013, 9:52 AM

US stock futures point to a slightly lower open Monday morning following the S&P's biggest weekly gain since December 2011. The index closed at its highest levels since 2007, which seems hard to believe. However, despite the slow economic recovery, we have to embrace the market we are in. In the short-term the market may need some rest after a blockbuster start to 2013.

 

Make sure to check out Scott Redler's predictions for 2013.

 

Market sentiment is starting to become decidedly bullish, and when you see consensus skewed heavily in one direction, it is a sign to be more cautious. Stocks and indices are extended off short-term moving averages, which often act like magnets. Throw in the fact that we have earnings season set to begin and the debt ceiling situation, and now is not a time to get carried away. Just because we do not feel it is prudent doesn't mean we think you should blindly short. Any set-up in either direction needs to be calculated.

 

The market has been able to rally despite persistent weakness in former market leader Apple (NASDAQ:AAPL). The stock has been very heavy over the past few months, and that has remained the case in 2013. Following a large gap up on New Year's Day, the AAPL has underperformed over the last three sessions, easily filling that gap. The macro chart remains bearish, and I would focus on other stocks at this point. Earnings in a couple weeks could be key.

 

Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) have taken the mantle as market leaders in the high beta tech sector. AMZN is gapping up to new all-time highs this morning after holding up near highs over the last few months. The stock has been a slow grind higher at times relative to its volatile past, but this is healthy price action for swing traders.

 

GOOG has shrugged off last quarter earning debacle and has its sight set on new highs, in my opinion. You could see money rotating from AAPL into stocks like GOOG and AMZN. Momentum traders like Mike Lee may choose to focus, however, on more liquid, lower priced stocks that do not have such large spreads as GOOG.

 

The banks have also picked up the slack big-time. The initial stand-out was Bank of America (NYSE:BAC), which has rallied more than 20% from our $10 trigger buy price. On Friday, BAC was up more than 1% but it was stocks like Goldman Sachs (NYSE:GS), Citigroup (NYSE:C) and JP Morgan (NYSE:JPM) that took turns leading the charge. I think after a very impressive run you could see some consolidation in the banks, so perhaps wait for some basing or a pullback to short-term moving averages before initiating new positions.

 

We have also seen many laggard stocks perk up over the last month or so, perhaps as a result of the January effect. Netflix (NASDAQ:NFLX) has climbed back near the $100 level and formed a nice uptrend. Groupon (NASDAQ:GRPN) has almost doubled since being written off as bankrupt when it fell below $3. Zynga (NASDAQ:ZNGA) still faces a very murky future, but had an impressive move Friday. Green Mountain Coffee (NASDAQ:GMCR) had a precipitous fall from grace, but also looks good off lower levels. Not every laggard stock is created equal and some of these stocks have brighter futures than others, but for the most part these are trading vehicles. When stocks become very oversold, there is great potential for gains when you take a bit of a contrarian view. We do not catch falling knives, but when a calculated bottom pattern forms these beaten-down stocks can bounce quickly.

 

Again, we try to always be prudent and calculated, and at these levels risk somewhat outweighs reward in a lot of areas. Even if you do miss a portion of the final extension in the market, in the long-run I believe taking a cautious approach will lead to positive results. Avoid the exuberance of the herd and be mindful of the big picture.

 

 

*DISCLOSURES: Mike Lee is long SPY PUTS

Last Updated ( Monday, 07 January 2013 12:18 )
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