Don't Juggle Too Many Stocks in This Market

The sideways drift of the market continues today, and tomorrow probably won't be any different -- nor will the day after that. As the sideways drift goes on and on, I'll likely find myself discussing it less and less, simply because nothing has really changed. That's just the underlying state of the market. At some point, this drift will indeed change, and the sleepy market will wake up with a start. But that will be then, and this is still now. So this dynamic will continue, and I think a lot of it is caused by quantitative ETF trading. Buy one ETF and you put upward pressure on numerous stocks. Sell that ETF and buy another, and your selling will put downward pressure on numerous stocks and upward pressure on another group of stocks. So the buying and selling always seems to be balanced. And if one sector seems to be weakening to a point where it's going to break technically, the buying appears as if by magic to prop it up. When I was a youngster, attending the University of Riverside and majoring in Biomedical Sciences, I was a very curious individual -- interested in everything. The classes I was taking were quite challenging for me, but one of my favorites, other than organic chemistry (where everything made sense like a pile of Lego toys), was physics. Why? Because it gave me an opportunity to study the laws of motion every night, by... ...wait for it... ...juggling lacrosse balls. For every motion, there is an opposite and equal motion. Every mass stays in motion, unless acted upon by an opposite force. All of those laws applied to juggling, and I could juggle four balls pretty easily (now, I'd be lucky to juggle two -- with both hands). But the trick to juggling is this: Throw a ball in the air. As it comes down, you start throwing the other one up. When you've sent the second ball higher, you reach over and catch the first ball before it can fall to the floor. Lather, rinse, repeat. And you do the same thing, at the same time, with the other hand. The central banks are juggling a lot more than four balls. They're keeping all these balls in the air with free money. If you consider this juggling analogy and apply it to the market, I think you'll be able to see what I mean. There truly are a lot of balls being juggled by a lot of different forces, but the end result is this sideways drift. In a way, it can make things easier, because you almost have a safety net. Any big decline will ultimately be caught -- like a juggler catches a falling ball. But this type of dynamic also leads to complacency. Rather than be complacent, try to approach the market more narrowly. Keep a handful of stocks. Maybe it's just two. Maybe it's five. Maybe it's ten. It's your hand, fill it with as many stocks as you like. But focus on a finite number of stocks that are moving in a way that you can understand. Just trade those. Don't pay attention to much else, just focus on your stocks. And if one stock stops behaving as you expect it to (i.e. an uptrend breaks), then just put it aside and find another stock that you understand. And trade the chart, not the ticker. If you can do that, then this sideways market won't be so irritating. It will actually cut down on your work, because you realize that the best work is focused work. If you can focus, you can prosper. Let's look at some charts we can understand. I have been a big fan of U.S. Concrete because of its growth rate. The company has been growing earnings per share at an annual rate of 110% (using least-squares method over a three-to-five-year period). The chart has been fairly solid, with tags of the 200-day moving average turning out to be great buying opportunities. But all of that changed last week, when the company reported a 23% decline in earnings vs. the same quarter last year. If there's one thing that growth-oriented investors hate, it is contraction. Now, the stock is falling below the 200-day moving average on heavy volume. There are two sides to this stock chart. First, if you are a short-term trader, you might consider taking advantage of any oversold bounce from current levels. But absent that little trade, this is a stock that is under distribution. That's not something I want to own right now. Maxlinear has been a crowd favorite, running up 260% since the 2014 low. But the company just reported earnings that topped estimates, while revenue fell short and it lowered its guidance. On this chart, you'll see that each pullback turned out to be a great buying opportunity. Is this the next chance to buy? Maybe. But be careful. The stock fell 20% on 10x average volume in response to the disappointing earnings. So if you're buying, use a tight stop. And if the 200-day moving average fails to hold, I'd sell. This daily chart of CyberArk Software shows a similar drop to the one we've seen in MXL -- after a disappointing earnings report. But the big difference I see is that CYBR is just coming out of a base that began with a climax low in February. The stock has fallen just 5%, and is testing the 50-day moving average -- a typical moving average that tends to attract buyers and sellers. I'd be a buyer now, with a tight stop just below $50.00. This daily chart of Endo International shows a breakout from a volatility squeeze on Tuesday, with a slight follow-through yesterday. These types of quick breakouts tend to lead to higher prices, though there is no guarantee of continuation. (Check out the daily chart of Valeant for comparison, which shows a slight pullback after a Tuesday breakout). But here, the stock bottomed in May and has been printing higher highs and lows ever since. So I think the bottom is in, and I'd use this breakout as confirmation that the stock is going to continue higher. ENDP is up more than 20% in just a couple of days, so you might want to wait for this move to cool off a bit before buying. Be careful out there.

Don't Juggle Too Many Stocks in This Market

Just pick a few, with charts you can understand.

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