The market started off quiet today in the wake of last week’s strong gains and some pressure after Greece failed to elect a president in its third round of elections.
This is a fairly typical pattern for this time of year, and I expect seasonal factors to continue to dominate trading this week with another holiday ahead on Thursday. We’re likely in for more light volume as some portfolio managers window dress their portfolios to make sure recent strong performers are represented in their holdings, or sell out of names for year-end tax purposes.
As we talked about in last week’s update, lower volume can make it more difficult to confirm clear trends so we’ll remain selective and won’t put on many trades in the final days of 2014. Another seasonal factor is gamesmanship, which can send certain names higher but not necessarily in a predictable way. For example, Palo Alto Networks (PANW), which has been a standout in the hot security sector, spiked to a new high on Friday but dropped sharply this morning on no news. This is the kind of guessing game that we want to avoid until more clear trends emerge.
As a result, there is nothing new on my watch list this week other than the usual suspects that stand to perform well on year-end money flow. Facebook (FB) is still a potential trade candidate, as it has pulled back a bit after moving higher last week. Financials remain a leading sector, with Bank of America (BAC) hitting a new high last week and Goldman Sachs (GS) working on a new one today, but I want us to avoid chasing these momentum names at such elevated levels right now. Due to the unpredictability of this week, any trades that we do put on will have an expiration date of January 9 or later to help lessen our risk exposure.
Instead, we’ll let the year-end action play out and look to get back to active trading on Friday and into next week. By then, all money managers and traders should be back to work, which will give us a better idea of how this year-end performance will carry into 2015. I’ll be watching leading groups closely for an indication of profit taking amid the strong rally, and biotechs will be a key industry. Not only was the sector one of 2014’s best, but it’s also a good measure of speculation sentiment. Historically, when biotechs and small caps are in favor, investors tend to take on more risk and shy away from panic selling. Financials, which have been up since the Federal Reserve indicated there was no rush to raise rates, are another hot area to watch. I’ll also have my eye on the big headlines dominating the market right now, including oil prices and Europe, as they stand to influence early trading in the New Year.
While we could be in for a bumpy start to the year depending on how these factors play out, I in no way see it as an indicator for how the rest of the year will perform. We’ll talk more about what I see ahead in 2015 and how it will impact our trading strategy in the coming weeks. In the meantime, I will be in touch with a Flash Alert whenever I see the right opportunity emerge. As a reminder, the market will be closed on Thursday for New Year’s Day.
I wish everyone a very happy and safe New Year!
Sincerely,
Hilary Kramer
Editor, High Octane Trader
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