• Kaiser L

Individual Stocks Are Increasingly Over-extended, With Fewer Pockets of Opportunities Available

The post this week will be relatively short due to swift market rotations that are occurring lately. Hence, I won’t be discussing specific plays this week. Specific plays this week are going to be largely influenced by what I am seeing in the market, then adjusting my trading plan accordingly to capitalize on the short-term price momentum.

However, I have been observing an increasing number of failed breakouts attempts as they often “breakout” during the early trading hours before tapering off subsequently. Furthermore, a significant proportion of the stocks on my watchlist are already extended from the 50DMA. Hence, I am already raising my stop-losses across all my portfolio to lock in profits. Yet, there are still pockets of opportunities in the market that seeing an inflow of smart money because they are less over-extended. Some of the top sectors that saw increased or renewed interests last week are solar, electric vehicle infrastructure, bitcoin-related and cybersecurity, building materials. My current strategy is to minimize any changes in my longer-term portfolio (Position Trading Strategy) apart from locking in gains. Whereas, the bulk of my trading would be catching short-term price momentum in these small pockets of remaining opportunities through equities or options.

Generally, the broad market is seeing consolidation through time rather than a knee-jerk pullback. Yet, short-term market pullbacks of 3% - 6% are still likely to occur, which are healthy for the market.

If we are looking at the longer-term trend, I still affirm the view we are in a long-term, bullish uptrend. The vaccines are going to encourage greater optimism, and an influx of more cash into the market going into 2021. Furthermore, the FED also stated that they will “maintain this target range until labour market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 per cent and is on track to moderately exceed 2 per cent for some time.” Furthermore, the FED is also expanding its buybacks of “treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month”. When we look at the past 12 years, quantitative easing (QE) has artificially induced the bull market rally (Fig 1), and I do see this round of QE to continue driving the equity market to higher levels for the foreseeable future. Hence, until any drastic changes, equities will remain my primary investment vehicle.

Fig 1: QE has artificially fueled the bull market rally for the past 12 years.

The last tidbit of market update last week is the index rebalancing that saw the addition of Tesla ($TSLA) into the S&P500. Hence, the market saw heavy trading volume in the major US indices and ETFs that tracked these indices. For those who do not follow the US market closely, you should also discount it when you are looking at major US indices or ETFs on Friday.

Have a nice weekend!