Run Up or Roll Back?

 | Jan 07, 2014 | 4:29 PM EST
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Good stock picking-action continued today, and this time it was reflected in the indices. Although there have been quite a few complaints about the slow start to the year, the action hasn't been that bad, and there have been a few pockets of good action in groups like solar energy and banks.

Today, the positive action broadened. We saw 2-to-1 positive breadth and a number of big-caps perked up, like Facebook (FB), Yelp (YELP) and Google (GOOG). There was also good speculative action in small-caps like Fonar (FONR), Plug Power (PLUG), Zhone (ZHNE), ChinaCache International (CCIH) and others.

The big question is whether we are ready to run back up to the all-time highs hit on Dec. 31, or are we going to roll back over as positive seasonality comes ends and concern grows about the upcoming earnings season.

I'm giving the bulls the benefit of the doubt because of the good action I see in many individual stocks. It's obvious that there is a good supply of traders looking to put money to work, and they are still willing to chase to do so. Chasing was rewarded so consistently last year that many money managers are more likely to do it this year so they don't lag badly, like last year.

Many money managers kept waiting for pullbacks in 2013 when we ran up straight up to start the year. That put them behind, and they never were able to catch up. I'm sure many are fearful of that happening again, so they are buying strength like the one we had today rather than waiting for pullbacks that may never come.

I don't think the action is going to be so lopsided this year, but, for now, the positive momentum continues.

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

Jan. 7, 2014 | 2:15 PM EST

Don't Get Cute -- or Short

  • The bears have been slaughtered with that approach.

The action today looks a lot like what we saw in the last half of December. There are many runners, and the best ones are already somewhat extended.

It is very easy to lock in gains prematurely and I'm kicking myself for making partial sells in Canadian Solar (CSIQ), Fonar (FONR), JinkoSolar (JKS) and Plug Power (PLUG), but the discipline of taking incremental profits into strength has served me well over the years and I'll continue to do so for as long as I trade. The key is to keep in mind that just because you sold a stock it doesn't mean you can't rebuy it at a higher price.

The problem now is putting money back to work. While there is lots of strength, the entry points are challenging and I don't have much new. I may add to Zhone (ZHNE) on a good close and I'm considering adding to Facebook (FB) on a strong finish, but I'm afraid patience will be needed before putting a bigger chunk of cash to work.

The lesson of 2013 was not to underestimate the power of momentum. It seemed like whenever I complained about having to chase entry points, we would keep on going. The important lesson was to not get cute and try to short into strength. The bears have been slaughtered with that approach. It can be tempting to try to use ETFs to put on a hedge when you feel the market is extended, but that has been costly.

We'll see if the bears can add pressure into the close for a fourth straight day, but I suspect that the bulls will continue to push. Now if we can find some new inventory, we'll be in good shape.

Jan. 7, 2014 | 10:27 AM EST

Big Mo Is Back in Town

  • Traders are itching for action and digging for opportunities.

After three days of poor action in the indices, Big Mo is back in town.

The hot money is chasing a raft of stocks, including big-caps like Facebook (FB), Yelp (YELP) and Google (GOOG). The solar energy sector is on fire with Canadian Solar (CSIQ) leading the charge. Small-caps like Plug Power (PLUG), Ballard Power (BLDP) and ChinaCache International (CCIH) are being chased higher. You can see that traders are itching for action and digging for opportunities.

The tricky thing about this action is that you have to be willing to chase or you won't find many entries. The reluctance to do that is what caused many hedge funds to underperform last year. You have to look at charts in a different way, and that is not easy for many traders.

I definitely have far more idle cash than I would like, but rather than panic buy, I'm going to inch in slowly and pay up only later in the day if things continue to hold.

Big Mo likes a good party and he seldom goes home early.

Jan. 7, 2014 | 7:31 AM EST

Trader Mentality Replaces 'Buy and Hold'

  • Good returns will require market timing and stock-picking skills.

Intelligence is the ability to adapt to change. -- Stephen Hawking

Despite the worst start to a new year since 2005, the major indices remain in an uptrend. The three-day losing streak to kick off 2014 is nothing more than some routine consolidation after a big run in December.

While it is possible that this poor action is the start of a topping process, there is nothing to indicate that the market is about to fall apart. In fact, it can be argued that we needed this pullback in order to consolidate gains and to set us up for another push higher.

The anticipatory bears will tell us that the market is losing positive seasonality, we no longer have the Fed dishing out quantitative easing to act as a positive catalyst and the economic recovery is tepid at best. Technically, while the market is still holding above key resistance, we have seen a high level of distribution for a while and there has been chaotic leadership. Banks, which have been performing well lately, are seldom a group that leads the market higher for long.

The bulls' response is 'there you go again'. The bears never learned the lesson of 2013, which was to not anticipate market turning points. Just when you start to think that the market is about to roll over, we seem to find our footing and the chase to the upside is back on. Time and again the bearish arguments have been rejected despite their great logic. The way to play this market is to wait for weakness and react to it as it builds but even that approach has been dangerous as we never seem to build much downside momentum.

I believe it is very unlikely that 2014 is going to be play out like 2013, but there still is no compelling reason to embrace a pessimistic viewpoint. If you are feeling a bit nervous about the market like I am, then the way to play it is to trade tightly and dump positions at the first sign of trouble. Building up big short positions is just too dangerous, especially in the early part of the year when there is still the possibility of cash inflows to drive things up.

Although the indices are off to a poor start, it is nice to see that the action isn't highly correlated and that there has been plenty of good trading action if you dig under the surface. Select names have been moving nicely but you have to sharpen your stock picking skills to profit.

Market players were often bailed out in 2013 by stocks that moved in unison to the upside. If you waited long enough the market would often drag a bad trade higher and bail you out. Trading skill was secondary to simply having faith that the market would continue to trend upward.

Buy-and-hold was the way to play the last few years, but I believe 2014 will see a return of the trader. It is going to be a choppier environment and to produce out-performance will require good market timing as well as stock-picking skills. That is much more work than simply holding for the uptrend, but hard work will be well rewarded.

We have a little oversold bounce kicking in this morning and we'll see how well we hold on to the gains today. The market has been opening up and closing weak, which is an indication of a change in character. So far, the damage has been contained. We'll see how it plays out today.

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