Stock Market: The Chase Is On

By John Darsie & Marc Sperling | Author's Blog Nov 22, 2013, 10:03 AM 

US stock futures are up slightly after mostly small gains around the world overnight. After a muted sell-off in our markets the first three days of this week, yesterday we got a solid bounce to erase most of those losses. However, traders right now, I believe, are paring down expectations into the end of the year after a massive 2013 rally. I think the right approach right now is continuing to stay tactical on the indices while rotating through the best set-ups to try to deliver alpha.

The S&P never breached the prior breakout level of 1775 and never meaningfully closed below its 8-day EMA, which was a clue that this correction wasn’t likely to amount to much. It has been rare in 2013 to see a three-day sell-off, and even though the losses each day were minimal, pressing shorts on the fourth day down has not been a prudent approach.

The reality that Janet Yellen is set to be the new Fed Chairman is starting to sink in around the world, and it seems she will be even more dovish than her predecessor Bernanke. As a result you have seen some defensive sectors like the Homebuilders (XHB) and at times the Utilities (XLU) improve, while some momentum names have seen some selling.

The biggest sector-specific story this week has been the 3-D printers. While the market’s losses were small Tuesday and Wednesday, the printers corrected violently after putting in big topping tails on Monday in the parabolic stage. Yesterday, though, those names bounced to varying degrees. The names in the group to follow are leaders 3-D Systems (DDD), Stratasys (SSYS) and second-tier, more volatile and speculative names ExOne (XONE), Voxeljet (VJET) and Organovo (ONVO).

The banks have emerged as a source of leadership for the market of-late after JP Morgan (JPM) finally finalized its penalty from the DoJ. The $13 billion settlement is certainly not chump change, but I think the stock and sector were just eager to get the ordeal behind them. The best-in-breed bank has been Bank of America (BAC), while Citigroup (C) now also has a compelling set-up.

The Biotechs (IBB) are also setting up again for another potential breakout. The sector has been one of the strongest in the market for 2013, but also was among the hardest hit in the early October correction. However, the ETF has repaired itself well and is now set to open at new highs. The group is also getting a boost this morning from Biogen (BIIB), which is up more than 10% pre-market after winning European protection for the launch of its MS Pill.

Overall I think the rest of the year will be a tactical period where traders with quick feet will have the best chance to create more cash flow. Measure your time-frame and go from there.

Disclosure: Scott Redler is long ZNGA, AAPL, GOOG, C, BAC. Short SPY.

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