Monday, December 27, 2010

Fleeing From Quality

The indices ended with just minor changes on the day, and we had the lightest full day of volume this year, but we still had a holiday atmosphere. The dip-buyers jumped on the gap-down open created by some monetary tightening in China, and strength in banks kept the indices up.

It was the action under the surface in speculative "junk" that gave the trading its holiday feel. Lots of biotechnology and mining names with no revenue and/or no earnings led the charge. Biotechnology names like DAR, RPRX and BPAX attracted interest, and the rare-earth mineral plays, like AVL and REE, were particularly hot.

This sort of action can make for some good trading, but it is definitely a warning sign. When market players are chasing such poor quality and dumping things like AMZN, NFLX, GOOG, FFIV, etc., that tells you we are in the late phases of a upside run.

If it weren't the last few trading days of the year, I'd be much more concerned about a top, but this is not the time when the sellers can take control. The end of the year and the first few days of the new year are typically controlled by the buyers, but then it becomes much more dangerous. I don't like to anticipate, but I will be keeping that in mind, especially if we continue to see such aggressive actively in speculative junk.

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