It seems not much has changed in the market in 2011. On the first trading day of the New Year we saw new money pour in, leading to a gap and go scenario. However, stocks faded in the afternoon Monday and continued their slide into that New Year’s gap on Tuesday. Skeptics began to call for caution and the beginning of a possible correction while the market, like clockwork, rebounded to multi-year highs. This morning, we are seeing small upside continuation, proving once again that it does not pay to doubt this market rally for now.
Sector rotation into financials
At each turn, this market has proven itself resilient, but it has not been easy for active traders. We have seen very defined sector rotation as commodities have pulled in hard and financials have taken their turn as leaders. The laggard bank stocks performed admirably in the 4th quarter of 2010 and have maintained that strength into 2011. Bank of America Corp (BAC), after trading near $11 in December, has it sights set on $15. Wells Fargo Company (WFC) has surged nearly 40% since mid-October. It feels like just yesterday that Citigroup (C) was trading below $1, and the stock now rests at the $5 threshold that could see new institutional money roll in.
Usually, when you start to see lagging stocks and sectors lead the push higher in an overbought market, it can be a sign that a short-term top is imminent. During this rally, however, we have seen virtually continuous sector rotation. Bull markets can remain overbought, by nature, for an extended period, so while it pays to be cautious at these levels, it is not a time to abandon your long bias. Continue to focus on the rotation and follow the footprints of institutional money rolling in during January. This reversion to the mean in the financials could be a theme to watch in 2011 as the banks put the financial crisis behind them.
Tech and financial stocks will also continue to do well in the first quarter of 2011, believes Scott Redler, Chief Strategic Officer at T3Live.com. He revealed his trading strategy for the first quarter of the year last night on CNBC. Redler included Las Vegas Sands Corp (LVS) and Google Inc. (GOOG) as potential longs this morning out of recent bases in his daily Pricepoint Sheet.
China in focus; rare earths take a break
Rare earth was a hot story in the second half of 2010 as China, which exports more than 90% of the world’s rare earth supply, announced intentions to cut export quotas by more than 10%. These highly speculative stocks like Molycorp, Inc. (MCP), Rare Element Resources Ltd. (REE), Avalon Rare Earth Metals Inc. (AVL), and China Shen Zhou Mining & Resources Inc. (SHZ) have been a boon for short term traders, providing large moves in both directions. Yesterday, though, we saw rare earth take a bit of a break after some profit-taking, according to Steve Levay of T3Live.com.
A better place to look for a trade this morning, says Levay, is with another China-related stock, China MediaExpress Holdings Inc. (CCME). The company provides TV advertising on inner-city express buses in China. The stock nearly tripled in 2010 before pulling in and consolidating in a long-term base. A break through the $17 level in CCME should ignite a move higher, with the potential to hit $20 in the coming weeks and eventually test previous highs above $22, according to Levay. He says short-term traders could also look to take some profits on the trade between $18-19.
Is the grill too hot?
Evan Lazarus of T3Live.com is making a contrarian call on Chipotle Mexican Grill, Inc. (CMG) based on what he sees as a classic topping pattern in a stock that has traded aggressively higher throughout 2010. Lazarus identifies a two-month head and shoulders pattern that offers an attractive risk to reward scenario. He sees an entry at current levels and will place stops at $231. The measured move upon a breakdown is $190.
Check out T3Live.com’s Virtual Trading Floor to follow these traders and their live portfolios in real-time throughout the day! Take a free trial.
*DISCLOSURE:Â Scott Redler is long C, LVS, CCME, GOOG. Steve Levay is long C and LVS. Evan Lazarus has no relevant position.
This material is being provided to you for educational purposes only. No information presented constitutes a recommendation by T3 LIVE or its affiliates to buy, sell or hold any security, financial product or instrument discussed therein or to engage in any specific investment strategy. The content neither is, nor should be construed as, an offer, or a solicitation of an offer, to buy, sell, or hold any securities. You are fully responsible for any investment decisions you make. Such decisions should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance and liquidity needs.
