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When the market sees a steady overall bid pushing it higher, like it has in recent weeks, the natural tendency for many traders is to acknowledge the progress made by bulls, but to prefer buying into it only after the market corrects. It is very easy to pull up a chart of the S&P 500 Index and magically declare that 1270 is a place where you will allocate your precious capital, because otherwise stocks are for the birds if they keep moving higher from here. The problem with that line of thinking is that the market has a knack for making even the most polished and veteran of technicians look foolish. Understand that we have already corrected from 1333 down to 1300 over the past two weeks. While Friday morning’s jobs data could spark a major sell-off, the bulls have earned the initiative and this market is theirs to lose.
During uptrends and rallies, the hottest stocks will naturally become extended. At that point, we see the bulls’ true test of mettle, in the sense that either capital rotates out of equities as a whole (bearish), or instead rotates out of the extended names and down to stocks setting up behind the leaders (bullish). I refer to the latter, bullish scenario as “lock and roll,” since traders are locking in gains from the extended names, and rolling them back to stocks set up next in line. What the bulls want to see is that continuity between capital rolling back into other stocks as the leaders take a well-deserved rest.
I view the “lock and roll’ test as important not just intra-market (such as the coal, solar, financial names finally starting to sustain moves), but also intra-sector, such as with the biotechnology stocks. Clearly, many biotechs have seen great runs of late. We have successfully been playing quite a few inside 12631, as I have detailed the sector’s new leadership role in many posts over the past few weeks. Of course, quite a few of those stocks are too extended to touch for swings right now. Accordingly, I am looking to see whether we get a lock and roll down to the following biotechs setting up behind the leaders.
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Right on!