Market action summed up in one word: UNCERTAINTY. Institutional investors don’t know which way to respond – major bank earnings up (good), oil prices down (bad), potential headway on healthcare reform (good), French election outcome may jump-start a Frexit, further weakening the EU (bad). Number of optimistic institutional traders outnumbered pessimists, for yet another weekly reversal of many stock prices, repeating the pattern of the past two months.
Of the four major investor sentiments, this is by far the most challenging to trade. Broad optimism provides us with great gains from sustained long positions, broad pessimism provides us with great gains from sustained short positions, and at worst, broad absence of enthusiasm leads to flat prices, for no gain or loss. But the broad sustained uncertainty we have been seeing among institutions produces a great deal of short-duration whipsaw trading that generates many small trading losses in-a-row, that do add up, and leaves many current positions “in the red”. The “smart money” institutional investors are losing ground right now as they “churn” their portfolios and so are we as a result. Very frustrating, unproductive conditions the past few months for all investors.
The only silver lining to this dark cloud is that these lousy conditions often presage a powerful, sustained breakout trend that can be extremely profitable (waiting for that to take shape . . . . any time now . . . . ).
We do have a few highlights, but those gains are only helping offset our losses on reversal trades and current holds. Short-to-long reversals predominate this week, exactly the reverse of last week.
Highlights: 3 new weekly highs in long positions. Only 4 stocks with double-digit long gains:
EVH +17% ABX +20% NEFF +85%
Only 1 new weekly low among short positions. Only 3 stocks with double-digit short gains:
ERF +14% NPTN +26% URBN +30%