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Option Millionaires was started in February 2008 to provide traders with information about option trading. Led by three career option traders, whose pseudonyms are JimmyBob, UraniumPintoBeans, and Vantillian, they started one of the most popular option trading communities on the web. Now, Option... More
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  • What's Leading What? Which Market Sectors To Buy Into Now

    With the first few trading days of 2014 proving to be less than impressive, some may be wondering what to be buying in this recent dip. Since numerous studies have proven that stocks in outperforming sectors tend to outperform over the intermediate term, investors should be seeking out the strongest sector right now and then initiate their buying within these strong sectors. So, what's the strongest sector?

    To compare performance of sectors, I use relative strength lines. The way to read these charts, in this case, is if the line is moving higher, the sector is outperforming the market. If the line is moving lower, the sector is underperforming the market.

    Technology's (NYSEARCA:XLK) relative strength line, while choppy, remains in a multi-month uptrend, indicating the sector is still a relative outperformer.

    (click to enlarge)

    Consumer cyclicals (NYSEARCA:XLY) and industrials (NYSEARCA:XLI), both economically sensitive sectors, continue to perform well. Therefore, buy candidates could be found within these sectors.

    (click to enlarge)

    Retail's (NYSEARCA:XRT) relative strength line continues to lose steam, and is at a multi-month low, reflecting an underperforming sector which should be avoided.

    (click to enlarge)

    The materials sector (NYSEARCA:XLB), after being a market underperformer for most of this bull market, is now a relative outperformer, with the sector's relative strength line near its highest level in close to a year. Interestingly, strength appears most concentrated among chemical stocks, such as DuPont (NYSE:DD) and Dow Chemical (NYSE:DOW).

    (click to enlarge)

    As for gold miners, see the chart below. The verdict for these stocks is still "not yet," despite the attractive values found in some miners, as the relative strength line of the Market Vectors Gold Miners ETF (NYSEARCA:GDX) continues to tumble. Junior gold miners (NYSEARCA:GDXJ) appear equally as risky. If one insists on buying gold stocks, it should likely be for trading purposes only.

    (click to enlarge)

    The chart below of the relative strength lines for consumer staples (NYSEARCA:XLP) and utilities (NYSEARCA:XLU) will likely cause pain to the dividend investors out there. The downtrends in these indicators show that these stocks remain consistent underperformers, likely as a result of rising interest rates on bonds, which typically negatively impacts high yielding, low growth stocks. An equally startling chart is the relative strength line of REITs (NYSEARCA:IYR), which has been falling sharply for months. All suggest that dividend hunters should stick to the cyclical sectors, such as technology, materials, industrials, and consumer cyclical to find their high yields.

    (click to enlarge)

    Finally, the strength of the financial sector appears erratic . As mentioned previously, REITs, which often move inverse to long term interest rates, have performed very poorly. Regional banks (NYSEARCA:KRE), on the other hand, tend to receive a boost when interest rates climb. And last, large cap banks (NYSEARCA:XLF) seem to follow their own path. Currently, the relative strength lines of both large cap banks and regional banks are climbing, indicating both market segments are outperforming. Therefore, picking a winning stock in one of those areas of the market will likely be easier than in other segments, such as REITs.

    What's the bottom line? Dividend players, in this environment of rising interest rates, need to stay away from traditional high yielding sectors (REITs, consumer staples, utilities) and look elsewhere. Opportunities for investing appear in many of the so-called cyclical sectors, with industrial and technology stocks leading the pack.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Jan 07 2:55 PM | Link | Comment!
  • Interest Rates Breaking Out To The Upside - TBT, TMV Looking To Gain

    TBT hitting $100 dollars by using a standard price projection? Even I had to second guess it for a few moments. If it does, however, then the early buyers here around $75 will be rolling in dough. Even if $100 is not in the cards for the ETF, it does appear that the short term trend for TBT, TMV, and other inverse bond funds has changed to positive, so maybe take an option trade or two and play the move higher in interest rates! Check out this video for the analysis and trade recommendations.

    ~D

    Nov 05 8:08 PM | Link | 1 Comment
  • The First Move Is Often False – Beware Of News Driven Rallies!

    The Fed should really consider looking at a momentum oscillator some time. It seems that the market reaction after the Fed makes announcements is largely dependent on the short term overbought/oversold condition of the market.

    To elaborate, at the September 2012 Jackson Hole meeting, the FOMC on May 22nd of this year, and the most recent FOMC release on September 18th, the Fed made announcements that should have boosted the market, but instead they each occurred at, or near, short term tops (NYSEARCA:SPY). Why? They made these announcements when the market was already severely overbought. See the chart of the DJIA (NYSEARCA:DIA) below for examples.

    (click to enlarge)

    Before delving into this, I will never say that buying an overbought market is a bad strategy. In fact, some of the lowest risk short term opportunities come from overbought markets (TSLA?). However, to understand why these short term tops occurred, we need to take a look at the dynamic between supply and demand during these news driven moves.

    After an extended short term decline, most of the sellers (in the short term) have had already sold. Conversely, after an extended rally, most of the buyers have already bought. So, when there is a positive news event after an extended rally, demand is most likely already exhausted, so prices cannot go much higher. Everybody welcomes the bullish news, but does not buy, since they have already bought. You get the super high volume on one or multiple days with little price movement as previous buyers sell into the any rally that develops. That is characteristic of an exhaustion move.

    On September 18th, when the Fed announced their would be no taper, NYSE total volume skyrocketed over 70% above its 50-day average, giving the day the ominous appearance of an exhaustion rally. After follow-through was weak on the next day and a powerful, high-volume selloff ensued on the day after that, we mostly have a short term top in place.

    In conclusion, exceptionally high-volume, news driven rallies, like we saw on September 18th and May 22nd, should be regarded with caution. This is especially true when these rallies have little signs of continued strong buying in the days after. I will most likely be shorting the weakest sector ETFs (currently XLE and XLU) on a test of the Sept. 18th high, if it occurs, with a very tight stop in case I am wrong.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Sep 22 7:09 PM | Link | Comment!
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