Part of my presentation in NY was a comparison of last year and this year in terms of environment, sentiment, and overall market health.
I’m going to give you a brief look at one item we discussed, and that is the overall rotation of risk from the 2014 October lows.
One comment I heard a lot back then was that most stocks weren’t participating in Stocktober. It was initially a fairly narrow rally like we’re seeing here. BTW- if you are an After Hours with Option Addict member, we went through this in some pretty decent detail last night. Worth a sub just for that piece.
Anyway, look at the following chart. In my mind, I give stocks a risk rating: 1-5. You can do this A-F as well.
MSFT – 1, AMZN – 2, FEYE – 3, YOKU – 4, etc.
You can look at a few 1’s as INTC, GS, DE…whatever.
A few 2’s – NFLX, GOOGL, PCLN, etc
So on and so forth.
Take a look at this graph. The quality names rallied first, then most flattened out, even pulled back into year end/early 2015.
Take a look at AMZN, NFLX, GOOGL, etc. Stocks I would consider to be 2’s. They continued lower after October. Their bottom was in Nov/Dec/Jan after the rally matured.
Stocks like FEYE, YOKU, etc? Many didn’t bottom til 2015, and rallied in Feb-Apr while quality stocks underperformed.
The key now is finding out when the leaders of this rally start to slow down. We looked back into last year’s rally and found that the signal that helped find the top for these early leaders happened to be my overbought/oversold extreme.
Speaking of which, all the early leaders of this rally….they are reaching overbought extreme this week.
We are near the point where if this trend is to continue, a rotation needs to take place. This is why it is the most important element to watch for next week as the market flattens out.