New Highs are entirely relative to your timeframe and how much heat you are willing to take immediately after. It ain’t always sunshine and rainbows when something hits “BLUE SKY TERRITORY.”

Take a look at the Semiconductor ETF chart below ($SMH), and you can see that new highs in the sector have led to short-term pain instead of an all-clear signal that all is well.

Click to ENLARGE and read the notes.

You can see a similar pattern in the Nasdaq 100 and the S&P500.

Sometimes it is best to curb your new high enthusiasm.

Whether or not this most recent high suffers the same fate as the previous five highs is not the point. The point is that a new high on stock or ETF won’t change the fact that stocks and sectors GO UP AND DOWN NOT UP OR DOWN. A new high does not necessarily mean a smooth ride or that you won’t come across sellers because everyone is at a profit, which is what many say when they talk about new highs, hence the term blue sky territory. But I will tell you who the sellers could be, the guys who bought the pullbacks, the buyers who believe in the fundamentals of the sector, not just the price action.

There’s a big difference between price conviction and conviction in the fundamentals. Those who have price conviction bail when the underlying instrument breaks support, or a moving average, etc. Those with conviction based on fundamentals view pullbacks as buying opportunities.

Know your role.

I, for one, believe that ETF’s are more of mean reversion vehicles; in other words, it usually makes more sense to buy the pullbacks in ETF’s than to chase the highs.

Don’t buy new highs blindly.

You can find Stocks Before They Breakout Here and Here


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