Our primary trading encompasses the philosophy that markets move sectors, and sectors move stocks. Here are our thoughts for the day: Markets
Still Short-Term Overbought
We're still a bit overbought and the odds favor some sort of pullback over the next few days. The problem is the lack of volatility in the marketplace. We suspect this may last another few weeks until Labor Day, which has historically brought higher volatility and, unfortunately, lower prices.
Sectors and Stocks
Auto Parts: The Auto Parts sector has had some wonderful price action of late. Back in May, it broke through the all-important 200-period moving average at roughly 150ish, and has never looked back. Today, it sits around 185ish. The momentum crowd is clearly behind this group, and it would be dangerous to step in front of this freight train and put out shorts. That does not mean traders with existing longs cannot be proactive. For those of you trying to catch the exact top, you are destined to give back some solid gains reaching for that pot of gold. How do we handle a strong move like this? Let's take a look.
First off, our eyes quickly see the weekly chart approaching overbought levels. The fact that it pierced its 200-period moving average (weekly) is very positive. For the longer-term traders out there, we would sit and wait for a pullback. The daily chart is a tad extended as well, but we all know that overbought can lead to severely overbought. This group has that potential. In cases like this, those with existing longs and wonderful profits really can't go wrong. It might be a good idea to take a piece of your position off, and lock in some gains. Next, I would begin trailing a stop.
Finally, we would stick in offers at higher levels on small pieces of inventory. This way, the higher the group moves, the more you lock in incrementally. Trail stop, and keep it going until you get stopped out. For the longer-term position traders with existing longs, our eyes will be focused on the 170 level. This represents the 50-period moving average, and it might be a good place to put your stops.
Stocks to watch: Magna International (NYSE:MGA - News) and Lear Corp. (NYSE:LEA - News).
Morgan Stanley Cylical Index (AMEX:^CYC - News): The Cyclicals have been telling us the economic recovery is well on its way....or is it? Hindsight will sometimes tell us the cyclicals were dead wrong, or they were screaming to all the naysayers that the new bull has begun. When we look at the daily chart of this index, we see overbought prices, yet at the same time, we have not been given sell signals yet. This tells us the momentum guys are still reaching for stock, and/or the bears are puking up their shorts and covering. Regardless, we would be hesitant to put out shorts.
The uber short term should be taking incremental profits, and trailing the stops higher. How close should we trail? That is a function of each individual's risk profile, however when momentum gets going, it is safe to say you can look at the previous day's lows, and that should keep you alive in a momentum trade. For the longer-term traders, our eyes will be focused on the 550 level, as there is solid resistance in the neighborhood.
The weekly chart as well is severely overbought, and is very close to giving us sell signals. It might be a dicey time to enter new longs. At some point, the momentum needs to rest, and profits will be taken. The short-term money will pile out, most likely causing a vacuum to the downside. We would look at the 50 ma as a point of entry in the future. If the CYC pulls back to rest near the 50-period ma, it might be a solid place to initiate new longs.
Stocks to watch: 3-M Company (NYSE:MMM - News), Johnson Controls (NYSE:JCI - News), Ingersoll-Rand (NYSE:IR - News) and International Paper (NYSE:IP - News)
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