This post Seasonal And Sector Rotation. The Distant Cousin of Technical and Fundamental Analysis goes over some more information about understanding a LONGER term seasonal and sector rotation.
But as a swing trader looking to post shorter term gains, the goal is different and a cycle still operates in a way. The cycles still exist on a very short term basis that has a wave-like nature to it. This cycle on it's own is about catching the low and selling the high. BUT, there are more important factors at work in producing larger gains by catching and understanding the nature behind the rotation of the market as their confidence with the current market grows.
After a strong pullback, the market is spooked. There may be a short covering rally, but it is too short lived to try to time the overly beaten down stocks. Instead, most of the time, you should be looking to cover your hedges and shorts yourself, and get into quality names. Once the buyers really come in, they will start with the quality names. These are charts that are not technically broken, that may even pay a yield, that are perhaps larger more well established companies that have been around for awhile that investors look to add to longer term positions when they are putting their cash to work. They may have lower beta and larger market cap with a great business strategy that gives them longevity. If someone is going to risk getting caught holding the bag, they will not want to do so with a penny stock. No one else will be buying those higher risk names during a corrective phase, so neither should you. The quality names that you don't mind getting stock with a long term investment are the type to buy on a correction as once the buyers come back in, that is where they look to first.
The idea is to FRONT RUN and anticipate the rush of buyers, but not to do so too far in advance and basically go along with the market. But you recognize what the market is doing and where the shift is occurring before hand, allowing less confusion and more ability to more aggressively get into the right area, and with smaller capital you are more nimble and able to build a fully establised position while the rest of the institutionalized funds are still accumulating the position while you are using their buying to eventually sell into as you shift up the risk curve. Without identifying some sort of technically sound DEVLOPING pattern. For example if a sideways to downward channel is developing, that is great. If a falling wedge pattern is occurring you may even try to pick near a bottom if there is good support.
After the market attempts to make a bottom, maybe rises to retest and make an equal high near resistance, you might have some gains to take profits off of. Then it falls back and retests it and it is looking to potentially take off, or perhaps it is falling towards it's lower low before it looks to maybe break above the previous day high, then you can start to accumulate a bit of the quality names again, but also should start planning ahead and thinking about the "next" phase of risk. This chart is relevant on shorter term time frames as well.
As the market puts in a higher low, (after discouragement, equal high and now the first retracement) the market will then start to be able to get more confident. As a result, the shorts will get more nervous and you will have a greater likelihood of an attempt at a decent run. So at this point, a mixture between quality and "quality with some growth potential" get interesting.
If you can get through the "wall of worry", then you have a decent selling opportunity to take off the quality with growth potential as they pop and look to add later.
Then the "aversion" phase occurs and people suddenly want to reduce risk one last time. The fears of another major correction occur and it's really just a shakeout and the real meat of the first higher low on a bit longer time frame occurs. It's this chance when you will potentially see a much more aggressive shift into risk rather than the cautious time if you can catch near the bottom. You can attempt to pick a bottom in some really badly beaten down stocks at this point if you like because they will be oversold, particularly on bad news and areas in the sector and/or industry going under. I would get the high quality names IN this particular area. For example, AEM or SLW in the gold mining sector or BHP. You could even consider a riskier name like MCP if the "structure" of the chart at the time is "higher quality". See, you can use market weakness to buy a particular beaten down area and attempt to pick bottoms. Of course you won't always be right and picking the bottom is process that involves really knowing what you are doing that I will cover in another post.
In the aversion phase quality may have a brief window of opportunity followed by quality growth, followed by medium to lower quality with lots of growth on the right setups. Then the "denial" phase occurs briefly and momentum names will rip short sellers faces off, prompting the bulls with the confidence to really aggressively target names with high short interest. Finally in the exclamation point on the euphoric move, they go after the trashy stocks under $10 as the shorts who have profits in these names are forced to cover them to raise cash from the other names they have been chased out of. The degenerate risk takers are looking to make a killing at this phase, but they will finally push forward with a lot of force and it will be difficult to sustain the momentum. The momentum names are at a high risk of pulling back at this phase. The rotation more aggressively into higher risk names causes the quality names to begin to lag a bit and perhaps build or begin building a longer term base. The emerging market areas of value, growth, momentum, etc tend to lag this risk cycle just a tad as they typically are looked at as higher risk, and as a result may be an area to look at as the market sentiment shifts. The frontier markets lag slightly behind the emerging markets. However, these markets also largely have their own cycles as well so balancing these factors and assessing the stage you are in can get confusing to say the least.
The final "buy the dip" phase causes everyone to raise cash briefly, and finally as risk begins to return the degenerate gamblers aggressively pour all their wealth into penny stocks and emerging market penny stocks which are often included in what is referred to as "Chinese lotto" names. The perception for some time is that you can't trust the financial reporting because they are not as heavily regulated so they may have good "numbers" but you really have no idea. The overall concept is the names in china that are low market cap, beaten down, high short interest, and are really the last place left for the bulls to hunt down the shorts. Finally these pop right near the mania phase. Of course then you have the sharp correction.
You must stay ahead of the curve. You can try to hunt down the shorts before everyone else does aggressively and quick make big gains as you stay ahead of the rotation. Your portfolio allocation may be a mixture of various names, but you want to get your allocation more aggressively up the "risk" area of the market
The market is very "fractal" in nature.
That means the minute pattern exists in the same way as it does in the whole. A leaf largely has a very similar pattern to an entire branch as it does to an entire tree as it does to a forest full of trees. I wouldn't really call this entirely "fractal" but it is similar to the nature of the markets. The "sentiment risk cycle" that I posted will occur on a 30m chart as well as on a daily, and weekly and perhaps even monthly chart to a degree.
There are probably certain areas of business in general that correspond to risk of certain varying degrees depending on the cycle that consumer's have in terms of the same sort of confidence levels of spending and such. In other words, if consumers are cautious and with trepidation they will buy only what they need to survive. They will pay down debt rather than go into debt and only buy necessity. As the cycle then expands they will buy some discretionary items and perhaps they will pick up their buying of some things that aren't exactly a need, but are the everyday items. Perhaps now soda and coca cola products are bought, your less than necessary food items (Frito Lays/Pepsi) and your cigarettes which aren't a need for everyone, but try telling a smoker that when he "needs a smoke". Then maybe your watches and cell phones and jewelryand internet and big screen TVs as they have more to be able to buy. Maybe then as risk expands they may buy a nicer car or second car and higher end clothing and retail more aggressively depending upon the season as well. They may then look for money making opportunities, perhaps real estate and then the masses may start to invest and trade with their excess income and everyone gets into the "hot commodity" aggressively which could be bonds, stocks, real estate, gold, dot com stocks more specifically and so on. Of course the buying power no longer can support the prices and then people start cutting back what they least need first.
Seasonal factors as well as psychological ones and the point of the credit cycle of risk along with seasonal and other factors can create and shift trends. This occurs not only among one country, but between countries as well as perhaps capital shifts into the area with the highest growth prospects during the mania phases in the same way. The nature of risk needs to be understood not just as it relates to your portfolio, but also as it relates to psychology. If you can understand risk and how that changes what the market is looking for, you can learn to use this knowledge in conjunction with other knowledge about trading to enhance your ability to produce "alpha" larger return over the market's rate of return without necessarily adding risk.
No comments:
Post a Comment