Herd mentality
Sector Rotation
When sector rotations occur they generally evolve over time (as we see on the weekly RRG).
Sometimes, however, there is a catalyst and we have an immediate new 'flavour of the month'.
What we need to do is determine if this is a sustainable move - and one which is likely to evolve into a long-term trend.
Newton's first law of motion:
An object either remains at rest or continues to move at a constant velocity unless acted upon by a force.
In trading terms Energy, and some other sectors, were at rest for a while and the force (catalyst) in this case has been the news of the vaccine.
Questions we need to ask
Do the stocks making moves have good fundamentals, to back those moves, or is it momentum-based?
Do the stocks have good breakouts or are they bouncing off support?
Where are the stocks likely to be in 3 months time?
Instant gratification and quick profits are what most traders strive for.
[[We do not want to be most traders.
For new positions:
look for breakouts with momentum build-up before the breakout.
we want to see evidence of accumulation prior to the breakout.
For open positions:
we focus on the big picture in order to earn a consistent income from our investments.
pullbacks are a necessary aspect of a trend evolving.
when we look for pullbacks, we look for neat and orderly designs with a depth of 5-20%.
cycle through your stocks and see which stocks do not meet those criteria - and then consider the axe.
RRG for the last 2 days
All that have moved to the green quadrant (in the last couple of days) still need to prove their worth.
Jumping on the bandwaggon - without evidence or CoE - is what amateurs do. What we look for is a sound basis to enter new trades. Not rumours, news, or noise.
Where is the movement?
Energy is an area we have been discussing over the last few weeks in the weekly webinars. It has been stagnant.
So an abrupt move, on news of a vaccine, is not a reason for us to rush into the sector - unless backed by more evidence and time for a price set-up.
Is there a real rotation?
The divergence between S&P 500 (red line) and Russell 2000 (candlesticks) is expanding.
It has often had a 20% difference but that is increasing rapidly - to almost 30% in just 2 days.
So money is certainly moving into small-caps.
Will this be sustained - or is it a flash in the pan?
The only way to answer that is to watch for price set-ups. And the only way to get price set-ups is to wait and watch.
It is easy to jump ship, buy what is hot and feel good about having just made some quick money.
Unfortunately, that is more luck than real trading and trying to repeat that as a strategy is unlikely to work without incurring large losses.
What is the shiny penny syndrome?
This is the constant distraction and loss of direction at the earliest sign of something shiny and new.
The dumb money are experts in this and it's one reason why they never become good traders.
Currently, we should look to buy stocks that are temporarily out of favour, neglected and near support - if the fundamentals look good and/or the stock looks good.
And if we start to see evidence of rotation we will look to those sectors and industries for new opportunities - but we may need to wait so as not to get caught in a false breakout.
Let's go trade!
