Don’t Try to Be Too Cute

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I discussed the “lock and roll” concept just over one month ago in this post. The idea was to be on watch for a market that did not correct all at once. Instead, we would see capital rotate out of extended stocks, to “lock” in gains, and “roll” down towards other areas of the market that were either setting up or very beaten-down. The important point was to acknowledge that as the market had become more constructive since very late last year, it was correct to look for capital to stay within equities as an asset class, rather than fleeing all at once during some type of mass liquidation that the bears and macro traders had expected.

Despite the senior indices at or near multi-year highs, I have noted in my video recaps that plenty of sectors and stocks had been undergoing stealth corrections in February. Indeed, that fact holds true to the “lock and roll” concept because, as you can plainly see, the major indices are grinding higher. So, while the Russell 2000 small cap-led index has been lagging of late, other sectors like the financials–specifically the large banks–have seen inflows.

A 3-5% broad market correction can happen at any time and still be considered part and parcel of a potent uptrend. What gets many traders in trouble is trying to be too cute in timing one. Many of the traders looking for a 5% pullback when the S&P 500 was at 1280 are still looking for one at 1370. The ones looking for it at 1370 might still be positioned for it at 1425 and finally get it but, at that point, it is essentially a moot point given that the 5% down from higher prices will prove to have been barely worth shorting from the earlier level. Beyond that, the opportunity cost of failing to look for quality longs is damaging.

Of all the charts I look at, the Dow Jones Transportation Average sticks out to me. Here you have a sector that corrected during the entire month of February, and the fact that the trannies are facing higher oil prices presents an easy bearish argument. However, the weekly chart below illustrates that there is no heavy selling volume to speak of. In addition, the price pullback has clearly held above the key 5,000 breakout level, which has acted as multi-year significant resistance and support.

For all intents and purposes, the trannies have seen an orderly pullback after a major breakout and I see no reason to get cute trying to use this as evidence of a market top.

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