A Higher Level of Concern

 | Jan 06, 2014 | 4:20 PM EST
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The indices are 0 for 2014 after three trading days, but it has been nothing more than routine consolidation given the very strong end-of-year rally in 2013. The media make it sound dire since we are supposed to have cash inflows and strength at the start of a new year, just like the previous two years. There is an idea that the first few days are indicative of what sort of year it is going to be, so there is a higher level of concern.

Even though the indices have not been so hot, it continues to be a good market for stock-pickers with Facebook (FB), Fonar (FONR), Natus Medical (BABY) and Apple (AAPL) working today. I'm not inclined to be too negative as long as there are pockets of positive action, although the indices certainly don't look so hot.

What worries me more are bids drying up and support levels falling. That isn't happening yet, but but my gut feeling, as I wrote this morning, is to raise my level of caution and keep things tight.

The best thing I can say about this market is that selective stock-picking is working and we have not seen any major technical damage to the indices. Stock-picking will be much harder if things continue to erode, so we will have to stay on our toes.

Have a good evening. I'll see you tomorrow.

Jan. 06, 2014 | 1:47 PM EST

Happy to See a Change in the Pattern

  • I'll take volatility and stock-picking any time.

So far, 2014 has been a struggle for the indices. They're in the red again and don't seem to be attracting any dip-buying. There's support at the December highs, which was the breakout level and, so far, that is holding.

There are complaints about the poor start to the year, but I'm happy to see a change in the pattern. The last two years, the market went straight up from the first day of trading and never fell below that level. That's nice for the buy-and-hold crowd but the action now favors stock-picking, and that is how good traders can shine. Stock-pickers can produce relative outperformance in this market, and I always find it refreshing when hard work is rewarded.

The last few years have been driven primarily by extraneous factors, particularly the central bankers. The state of the economy has been totally irrelevant for the most part. Stocks aren't that strongly correlated with the economy most of the time anyway, but the last few years have been so disconnected that it has created a huge group of people who dismiss the market as being nothing more than a product of manipulation by insiders.

While this market action is dreary, I'm not unhappy to see it. Periodic bouts of poor action are normal, and what this market needs more than anything is normality. Many traders, including me, are tired of endless QE and lopsided moves. I'll take volatility and stock-picking instead.

Jan. 06, 2014 | 10:37 AM EST

Feeling More Defensive

  • I've had good trades lately and I want to lock them in.

The opening gap didn't last long and a weaker-than-expected ISM services number didn't help matters. Breadth is slightly positive and the indices are trying to stay positive. There has been a definite inclination toward selling into strength, which is a bit of a change.

Google (GOOG) and SolarCity (SCTY) are the big-cap momentum movers, but Twitter (TWTR), Amazon (AMZN), LinkedIn (LNKD) and a number of other stocks are under pressure. Solar energy has been the hot group, but it is consolidating after a strong open. I still like the group, but I'm not inclined to chase right now.

As I discussed in my opening post, I'm nervous about this market, so I'm playing very tightly. I'm ready to be aggressive with index shorts if we start seeing more pressure, but I'm holding off for now.

I have made a few new buys this morning, such as Fonar (FONR), which I added to the Sharkfolio, and Natus Medical (BABY), my Stock of the Week. I'm more concerned about defense than offense as I've had good trades lately and I want to lock them in. I'm going to keep digging for new buys, but it looks thin.

Jan. 06, 2014 | 8:03 AM EST

Nervous About the Indices

  • I will hit the eject button quickly at the first sign of trouble.

"The secret of getting ahead is getting started." -- Mark Twain

The holidays are over, seasonality has become less positive and it is time for us to start the hard work of making 2014 a success.

The market enjoyed an unusually upbeat Santa Rally this year, which took the indices to all-time highs. But keeping that momentum going will not be easy as we head into earnings seasons. The bulls are optimistic that cash inflows to start the New Year will keep things going this week, but I'm on guard for topping action and will be managing my positions very tightly

The first few days of the year have not been good for the indices but there have been some very strong pockets of action. Banks have been leading, solar energy is enjoying speculative chasing and there have been some select big caps like Twitter (TWTR) doing well. Apple (AAPL) has been a problem and some of the big-caps have slowed, which has hurt the indices but so far no major damage has been done.

What I've found most impressive about the market over the last week is the speculative strength under the surface. Good stock picking has been rewarded as there hasn't been strong price correlation among most stocks. One of the big challenges at times in 2013 was that stocks often moved in tandem and made individual stock picking unrewarding. I'm hoping as the Fed starts to withdraw its accommodative policies in 2014 that we will see a greater focus again on stock picking.

My general policy is to not to try to anticipate market turns but to wait for some actual price weakness before becoming more bearish. Despite that strategy I am a bit nervous about the indices at this point and can't shake the feeling that we may have some sort of correction soon.

When I feel this way I don't rush to load up on shorts, but I do try to keep things tight and start to think about where I might start to short the indices. The key is to have increased awareness of the potential for negative developments, but to not act on them until there is some hard evidence that the worries are justified. Too often market players will let their emotions drive them instead of waiting for confirmation through facts.

Despite my negative gut feelings I'm very aware that the easiest mistake to make in the last few years has been to anticipate market tops. Over and over again extended markets have become more extended, and this one isn't even that extended.

Asia performed poorly overnight and the analysts are quite busy this morning with quite a few downgrades. The solar sector remains very hot but there is an ugly downgrade of TWTR by Morgan Stanley.

At the moment we are looking at a slightly positive open but we'll see how well that holds. So far there is nothing really wrong with this market but I'm watching closely for negative developments and will hit the eject button quickly at the first sign of trouble.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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