The importance of the Cats and Dogs trades is that they often come at market extremes in sentiment just before a reversal. A few days ago the C&D trades dominated the top 25 stocks and the top 150, today they are notably absent, only 10 of the top 25 were C&D trades, one was URRE's gain today (one of our longs).
Conversely, 20 of the 25 worst performing stocks today were that Cats and Dogs, I mentioned this last night when I listed 5 possible C&D trades. In fact, I specifically said,
" I found a mere 5 trades that look good, I will say that I'm pretty shocked, I expected to have more like 30 or so, but going through the 32 stocks in a narrowed down watchlist, I found a lot of these Cats and Dogs trades are already burned out, meaning they drove them up and got the heck out of Dodge taking their profits with them, not at all what I suspected I would find."
I don't think this is a rotational issue as there was rotation in the C&D trades, biotech to shipping to Energy services, etc. The C&D trades aren't really a rotation in the market, they are more like a season and as I have maintained since I started talking about them and throwing some ideas out there, in my experience, they tend to make big moves right at the tail end of a bull move when sentiment is very bullish and traders who feel like they missed the move enter the market and look for stocks that are on sale.
Tonight's findings were not exactly expected, I had a hint last night just from seeing how many were burnt out (as I also mentioned, they are quick trades that can go up big and fall just as fast), but a complete mirror reversal from them dominating the top performing stocks to being the worst performing stocks (and these aren't pullback moves, they are collapses) in such a short period, was surprising.
It's time to tighten stops on longs, especially those that have a high correlation to the market (meaning they move with the market-we have several longs that have moved up against the market and those should be safer long plays). Most of you know what I'm expecting, there's just no way of knowing for sure when it will come (although there are many signals such as the season of the C&D trades that hint we are very close) and worse yet, the initial break can be devastating.
Just be diligent, have your risk management in line and look for those small changes that are out of character. I'm not trying to scare anyone, in fact this is one of the fastest ways to make money, I'm just putting out a cautionary note.
5 years ago
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