Broadcom’s Mean Reversion Catalyst

Last week I spoke of the need for a catalyst for the markets to mean revert.

It’s very tough to short overextended markets before such a catalyst arrives.
Remember “The markets can remain irrational longer than you can remain solvent” quote from a couple of weeks ago?!

Well, the catalyst arrived on Wednesday with Broadcom (AVGO)’s earnings and its subsequent 20% drop by Friday’s close.

20% is an interesting number in itself as I’ve been regularly showing and mentioning stocks that routinely suffer 20% drops from massively overbought positions.

And there will be more stocks to suffer that same fate … and worse.

What’s the lesson?

The same one I’ve been promoting for ages …
Don’t chase overexended stocks.

It’s a simple principle.

Market Outlook:

Last week I said:
“The mean reversion will happen, but it will need a catalyst and then confirmation. We’ll be keeping an eye on meaningful reversal signals, but for now follow the money and manage risk. That means, stick with our strategy to select bullish setups that are not overbought“.

The market crept up for two days, then the catalyst has happened, and we weren’t overexposed.

And now I would be amazed if there isn’t a widespread significant pullback …
For the indices that means to their 50-dmas.

Our market commentary continues to be outstanding. Mastering market timing enables you to swim WITH the tide at the right time.

Watch the video for more detail.

Market Timers:

• Longer Term Market Timer (OVIsi):
  Green.

• Medium Term Swing Timer:
  Plunging to the zero line. Likely to go negative.

• The Main Indices OVIs:
  Turning red apart from DIA, which will follow suit.

Stock Selection:

None of last week’s bullish highlighted stocks were a complete disaster, with most of them either not consolidating or not breaking out. You might have been unlucky with RGTI’s marginal false breakout – or not if it didn’t trigger. Many would have been put off by the wide consolidation.

This week I have to focus on bearish setups, though there are one or two bullish ones in the mix.