Bulls Playing Extra Innings With Tech
Following recent earnings reports and a helter-skelter market last week, Simpler’s traders are operating with a high degree of skeptical caution.
Especially after this week opened with all three major indices spiking higher and oil getting a boost.
Repeated pullbacks and rapid rallies in a bullish market can throw a curveball to traders. Simpler’s team recognizes that when the market is extended, the standard playbook works inconsistently. Traders undoubtedly recognize a bullish pattern in the market. But, how this week and the last will play into extra innings through the holidays and into next year is anybody’s guess.
Simpler’s traders continue to modify trades to reduce risk in rapidly changing environments like this.
While the market works through the chaos, the “FAANG” stocks continue to perform well. FAANG refers to finance technology, or fintech, companies that include Facebook, Amazon, Apple, Netflix, and Google (now Alphabet).
These companies are highly-recognizable among consumers and Simpler’s traders have targeted these tickers for profits for years. For FAANG and other stocks, Simpler’s traders base current valuations on fundamental strengths and technical patterns — which can indicate whether stocks are either overbought or extended.
When prices are extended, traders can anticipate that the unrealistic stock price will revert back to its trending price. Losses on overextended stocks can be brutal in a bear market and subsequently force traders to meet margin calls.
Similarly, stocks that are overbought can have a current market price based on the number of buyers pushing the price to new highs. When buyers outnumber the sellers, a reversal of direction causes the price to drop.
Is this market revealing a heavily overbought environment? Only time will tell, and caution is good practice here.
Simpler’s traders are shrinking weekly trades into manageable time frames when technical signals indicate a pullback in the stock price could be around the corner. Proper risk management helps traders reduce exposure in a market fraught with mixed signals.