A Little Speculation Is a Good Sign

 | Jan 12, 2012 | 7:36 AM EST  | Comments
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A speculator is a man who observes the future, and acts before it occurs.
-- Bernard Baruch

A better-than-expected Spanish bond auction is trumping a hot China inflation report and giving the market a boost in the early going. It would probably be better for the bulls if we opened weak -- we've rallied back from each poor start and sold off on each strong start so far in 2012.

The dip-buyers have been extremely persistent so far and have prevented any real weakness in the first seven trading days of the new year, but they haven't been able to do much but keep us even after the open. All our gains have come overnight on two days, with the action otherwise being relatively lackluster. It is positive and looks good to the news media but the lack of any real energy is making it challenging.

One encouraging change in the recent trading is that individual stock-picking is working a bit better. For much of the last half of 2011, stocks were very highly correlated and moved together in a group. All that really mattered was the headlines out of Europe; it didn't do much good to focus on anything other than the overall market direction.

Recently we have been a bit less sensitive to the movement of the euro, and that has helped produce an environment more conducive to stock-picking. In fact yesterday we had some good old-fashioned momentum action in some low-priced junk stocks. Solar energy was the hottest group, but we also saw some biotechnology, homebuilders and China names attract speculative interest.

Many market players view the speculative action in low-priced stocks as a sign that the market is frothy and that we are nearing a correction point, but I find it refreshing that we still have enough active traders around to produce this type of action. One of my biggest complaints about the market over the past year has been the lack of any real excitement. Even when we had these straight-up rallies and big moves, it seldom felt like there was any real joy among market players. We had some action in energy, and biotechnology has been hot lately, but there has been very little like the runs we had in precious metals, rare earths, solar energy or small-cap China stocks in the past. The hot money just hasn't shown up the way it used to.

I don't think the action yesterday is signaling a huge momentum move in solar energy or China stocks, but at least we still have the conditions out there that can product some decent speculative action. That makes me optimistic that down the road we might actually see some hot action and some big moves in select sectors.

Right now we need to deal with more immediate concerns. I expected to see a little follow-through to some of yesterday's speculative action, but with earnings looming next week I expect to see a little more defensive action kick in. Indications so far are that we aren't in for a great earnings season. We have ignored that for the most part so far but I'm looking for some market players to move to the sidelines in front of next week's reports.

Technically the market doesn't look bad at all. We are holding near the highs and the underlying support is solid. The lack of much upside traction is the biggest negative, and that might cause some profit-taking to kick in if we continue to sputter, but trying to anticipate weakness in this market is a good way to get burned.

We have weekly unemployment claims and retail sales coming up to help to set the tone, but right now it looks like we have an upbeat open on the way ... which has not tended to produce further strength recently.

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