ETF Trading with Larry Connors: How to Know When the Rally is Beginning

Yesterday I mentioned that Monday’s end of the day reaction to the S&P downgrade of the US would likely signify whether the move was factored in last week or if a recession was near. What I didn’t imagine was President Obama making a mid-day speech saying only “the wealthy have to pay their fair share”. He had no plan to deal with the situation and the market reacted.

The one major chance for the market to recover yesterday’s losses this week is a bold move made by the Fed. It may happen and if it does, it will catch everyone off guard and create a very large rally. There are a number of blue chip stocks selling 30-40% below where they were a few weeks ago. Each has strong earnings and is sitting on large amounts of cash. Funds and investors are going to eventually buy those companies, possibly as early as today.

Structural damage was done last week and it was worsened yesterday and that’s a big concern to me. To see banks like Bank Of America Corp (BAC | PowerRating) trading under $7 a share and rumors swirling about their financial condition is a reminder of 2008. Add this into an already unstable European situation and the risk remains extremely high.

With all this said, you’ll know when the rally is beginning. It will not come first from the blue chips and the most obvious names. Those come second. What goes up first are the high beta, often lower priced stocks.

An experienced friend who pointed this out to me many years ago (and it’s been prophetic) said the high beta secondary stocks rise first. Then everything else follows them. It’s counter-intuitive, but he’s had many years of market-making experience with a major firm – he’s witnessed it firsthand over and over again.

After he pointed it out to me, I watched it play out. August 2007 was the first time and it’s occurred a number of times since. Identify the high beta, smaller-name, lower-priced stocks which were hit very hard this past week. If you see them stabilize while the market is down, or start running on any upward movement in the market, you’ll know the short-term bottom is in and the rally has begun. Johnson & Johnson (JNJ | PowerRating) and International Business Machines Corporation (IBM | PowerRating) are not going to lead this rally. The high beta stocks will, then the blue chips will follow.

With so many factors occurring for the first time and at the same time (multiple Black Swan events), please use extreme caution. The volatility is going to remain for a while and therefore opportunities will present themselves for many weeks to come.

The above is from Larry Connors’ Daily Battle Plan.

To learn more about the Daily Battle Plan – including access to Larry’s daily ETF trading signals, click here for more information.

And for more on ETF trading, be sure to visit us here to check out the book that Stocks, Futures and Options (SFO) Magazine called one of the best trading books of 2009: High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading.

Larry Connors is founder and CEO of TradingMarkets.com.

Tuesday, August 9th, 2011 Uncategorized

1 Comment to ETF Trading with Larry Connors: How to Know When the Rally is Beginning

  1. [...] this article: ETF Trading with Larry Connors: How to Know … – Stock Trading Site August 10th, 2011 in London [...]

  2. ETF Trading with Larry Connors: How to Know … – Stock Trading Site | LSE Share Prices on August 10th, 2011

Leave a comment

You must be logged in to post a comment.