As we make our way through this round of earnings, I’m noticing a few things on both the fundamental numbers side and market reaction side. First, after the total market melt-up we’ve had over the past few months, we’re seeing the stock picker’s market come back.
Many of the market leaders are starting to get picked off one by one and taken down, often 7-10% at a time. This is what happens when the music stops, the momentum is gone and these stocks once again react to gravity. As a momentum trader, trafficking in these names, it is extremely important for me to have a keen sense of when things are starting to sour.
While the market may pull back 2 or 3 percent as it tops out and churns before starting a down trend, momentum stocks will drop drastically at the top as players rush for the exits and take gains. I’ve had a tough week as many of my holdings which had performed so well over the past few months got hit hard; I took my lumps, closed my positions for great gains, and then saw the market rally back up to the highs without me.
My exposure is a little greater than 60% long, but I’ve moved out of high beta tech plays and into energy and materials for the most part. I’m OK with giving up some alpha here to realign my holdings to better reflect my view that the market is overheated and tech needs to take a rest, especially the semis.
So back to earnings season, I promise this all ties in. I’m seeing many names-- especially in tech which had exhibited great trends--get smacked around. It will be interesting to see how they stabilize over the coming weeks, or if they lose the trend altogether. Although many leaders are getting hit, earnings across the board in tech have been stellar. There is a serious secular bull market in the semiconductor space going on, especially around mobile technology. If you are a long term investor, wait for some consolidation here, and then pick up some of these names, they are going far higher in my mind, this is only the start. Watch for Intel (INTC) to fill the gap from earnings, it always does, and then look for relative strength in your favorite names.
On the other side, anything retail or restaurant oriented continues to fly like an F-15. Earnings have been excellent in the specialty retail and casual dining names, why, I have no clue, but I know I love Chipotle Mexican Grill (CMG) and so do a lot of other people obviously. I won’t go into each of the retail stores that is performing well, but just take a look at charts of True Religion Jeans (TRLG) or Nordstrom (JWN), these things are flying. Even beds are on a crazy run for goodness sake, take a look at Tempur Pedic International (TPX). Are people really paying 2K for a mattress? I guess so. Maybe instead of using all that debt to fund the purchase of a house, people are using the same debt to fund things for themselves and the insides of their homes.
On another note, look at the relative performance between big and small biotech. First look at charts of Amgen (AMGN), Gilead Sciences (GILD), and Genzyme (GENZ), then look at the smaller names, Dendreon (DNDN), Human Genome Sciences (HGSI), and some of the others.
Notice something? The major relative underperformance from the big boys, who are putting out some great earnings reports. Gilead got cleaned up for almost 10% yesterday breaking all kinds of long term support levels.
I’m not a biotech specialist, and as you guys know I often shy away from holding the smaller biotech names for fear that I could wake up and see my position down 40%. So I asked some people who are more knowledgeable than I on the subject of why the larger names had been underperforming to such a huge extent. Derek Hernquist (@derkekhernquist) said:
funny sector…stocks have infinite potential until 1st profits, then spend forever absorbing multiple on real EPS.
This is a very good insight, and it’s obvious why their stocks underperform once the cash flows are steady. This begs the question though, why would anyone want to invest in a biotech after the point in time where analysts know what the cash flow will be from a certain drug? Just a thought.