Logic and Trading: A Dangerous Combo

 | May 02, 2014 | 12:08 PM EDT
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Logic and trading can be a dangerous combination. No, it isn't nearly as bad as drinking and driving, but it can crash your portfolio if you aren't careful. Who's buying bonds here? Who cares, really? The chart of the iShares 20+ Year Treasury Bond (TLT) is bullish in 2014. It goes from lower left to upper right. As a contrarian, I can see why Doug Kass is drawn to shorting bonds, but momentum traders are more likely buyers here rather than sellers.

Who else could be buying? Obviously, the U.S. government likes to be a buyer. Foreign governments are kind purveyors as well from time to time. And you -- yes you -- Mr. or Mrs. Retail Investor. Well, you or your spouse, or your kids or your cousin -- basically, all those folks with retirement plans who aren't self-directed are likely buyers of bonds. I know many folks who just choose random mutual funds or exchange-traded funds in their 401ks. They try to keep a diverse portfolio, so they pick six or seven funds and grab some bond exposure. If advisors are giving them help, you know, once every six months or so, they will generally try to cover their own behinds and lay out nothing but balanced portfolios.

Then you have the government Thrift Savings Plans or TIAA-CREF retirement plans. It is easy to end up owning a lot of government bonds in either of these plans if you are not on top of your allocations. So every few weeks or each month, new capital is constantly being pushed into these bonds that no logical trader is likely to buy right now. As I said, logic and trading can be dangerous. There are plenty of investors who don't give much thought to where their money goes each month, and much of that money is still heading into bonds.

Switching gears to the momentum names, I still think folks should switch their focus from the day-to-day action out to the weekly charts. These are going to stay volatile, especially if we are heading into a correction. The bounces and drawdowns are going to be big. Seeing moves of multiple percent per day is possible and it will likely be that way on a week-to-week basis. If we are going to sniff 2000 at all, then the weekly charts are all that matters. Pick anyone of the charts below from Facebook (FB) to Yelp (YELP) to Tableau Software (DATA) to LinkedIn (LNKD) to FireEye (FEYE) and you can find longer-term worries and concerns.

A head-and-shoulders pattern is evident on many of the charts. Even on the Facebook chart, which is the strongest of the group, there is still potential for a big move down. Price has been pushing higher in a strong bullish channel, but now a head-and-shoulders pattern has evolved within the channel. The most worrisome part is the 40-week moving average has been the death knell for many of the momentum names, and Facebook's neckline, the trigger of the bearish pattern, sits right around the 40-week moving average.

Keep these charts front and center as all five sit on or right above support levels. The next couple of weeks need to see upside or another 10%-20% lower could be seen on any or all five of these names.

Tableau Software (DATA)
Source: StockCharts.com


Facebook (FB)
Source: StockCharts.com


FireEye (FEYE)
Source: StockCharts.com


LinkedIn (LNKD)
Source: StockCharts.com


Yelp (YELP)
Source: StockCharts.com



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