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Sambuca is an Italian liqueur that is thought to aid in digestion after eating a big meal. With that in mind, one way to think about some of more extended sectors and stocks in the market of late is that they have just enjoyed a hearty five course meal over the past few weeks, when many traders had been betting that they would be in line at the soup kitchen begging for scraps. Now, after their feast, some might say that they ate too much and will be sick to their stomachs. However, another possible scenario is that those extended parts of the market merely need a good liqueur, such as sambuca, to help with digestion of the recent big gains.
Phrased another way, just because we have gone up does not necessarily mean that we are coming down hard. The S&P 500 has yet to so much as take out last week’s lows, yet on the first sign of red many traders are eager to embrace to short side of trades. In essence, we are correcting through time, even with names like Freeport McMoRan and the banks pulling in today.
I am still focused on stock picking, shunning the idea of taking on directional bets via index ETF’s. I do not see a market sick to its stomach and on the cusp of losing it all, but rather one that is digesting recent gains. We could easily pull in a bit more, but when that move is counter to the prevailing trend the risk/reward profile for that type of trade becomes unfavorable.
As today’s session progresses, I am looking to see if we get another strong close after a weak open, as has been the modus operandi of Mr. Market thus far in 2012.
