High Beta names have been beaten up badly in recent weeks, largely due to the reduction in excess liquidity by the FOMC. The tapering program has reduced the amount of free-flowing dollars in the financial system, acting as a tightening mechanism for high beta names in recent weeks. That has also opened the door for short sellers, but around long holiday weekends short sellers abate.
However, the week following any extended weekend is often counter-trend, and that is especially true after Memorial Day. Be careful, because some investors might think that these seasonally abnormal weeks define material sentiment shifts, where they are more often just temporary.
During Memorial Day investors get their first real taste of summer, many of them have a hangover from the extended break too, sometimes literally, and the market takes a few days to get back to normal. That begs the question what is normal, but for traders that is not the most important issue. For traders, the most important thing is what will happen today, and tomorrow, and what happens after that will be considered when the time comes. That is the mindset of professional traders.
For those who are prepared, aware, and ready for action at the beginning of this week, interesting moves in the NASDAQ are compelling for higher beta names again, and one potentially excellent swing trade surfaced yesterday. Facebook Inc (FB) looked very interesting for a short - term trade, and it is still in play.
On a fundamental basis FB is rich, with a current P/E over 70x, but the expectations are lofty and the forward P/E declines to 33x given those expectations. We could debate the probability of achieving those results, but that is not important to traders looking to take advantage of shorter term moves.
The most important thing is to go with the flow of the market, and recently the NASDAQ has been doing very well. Thus far, this week seems to be a carry-over of that positive sentiment in the NASDAQ, which also is positively influencing the Russell 2000, which n turn is why higher beta names like Facebook may be poised to do well in this abnormal week as well.
In addition, smaller investors usually rule the market when "hangover" situations like we expect this week come, and smaller investors are almost always buyers. Most of the ones we know also have traded Facebook, and that makes it a focal point as well.
According to our observations, if FB is capable of breaking above its midterm resistance level as we define that in our real time trading report for FB, it can easily test longer term intra channel resistance. FB would only trigger a new buy if it breaks above midterm resistance, and the expectations would be modest, but short term gains lead to long term success, so that could work out well for astute traders.
Our market observations tell us that the "hangover" this week can bring buyers to the table, but after the hangover is over the sentiment may shift again, and the higher beta names may not be in favor again as a result. This is not a green light to jump back into buy and hold investments in high beta names that have been crushed this year, but it certainly could be a short term continuation of the green light that came last week. Higher Beta maybe highly touted until the market gets back to normal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. FB was recommended to clients of Stock Traders Daily when it broke above midterm resistance.
Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies listed in this article for writing this article.