The Action Is High

 | Jan 15, 2014 | 4:34 PM EST  | Comments
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Stock quotes in this article:

bac

,

intc

,

tsla

,

abtl

,

otiv

,

rlyp

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zhne

,

csiq

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yelp

,

jazz

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yy

Just like 2013, the bulls saw the sort of follow-through that has become almost routine when the market bounces back after a poor day. Breadth was excellent, the indices had nice gains and more than 500 stocks hit new highs. Most of the major indices even managed to turn positive on the year, although the S&P 500 fell a little short.

So, is it smooth sailing from here? Are we ready to resume the uptrend that started in October 2013? That appears to be the smart bet. The upward trend is gaining traction again and market players are scurrying for long exposure.

The bears point out that the indices were close to flat intraday and volume didn't pick up much, but those are factors that have seldom mattered much when we have an uptrend. In fact, it seems that we do even better on declining volume.

Earnings season begins in earnest tomorrow night with the report from Intel (INTC). It is one report that has a history of marking turning points in the market. Expectations have gone up significantly in the last couple of days, so it is going to be of particular interest.

Plenty of folks don't trust this market. It is understandable, as the action so often feels manipulated or unjustified. If you are inclined to fight this market, my best advice is to be patient and wait for a shift in the character of the action. Anticipatory bears were buried in 2013, and this action is looking very similar.

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


Jan. 15, 2014 | 2:01 PM EST

Building a 'Wall of Worry'

  • Waiting for pullbacks just makes the wall higher.

The indices still reflect good-sized gains and breadth is quite strong with about 3,600 advancers to 2,000 decliners, but the momentum has slowed as mild profit-taking kicks in. Despite generally good action, there are landmines and sharp reversals to trip you up if you aren't careful.

The good news is that the action of the last few days tends to create good underlying support. All the folks who missed the move yesterday and don't want to chase the strength today are likely to join the ranks of potential dip-buyers.

Although the bears complain that sentiment is too frothy, the sort of action we are seeing now is a form of "climbing the wall of worry." The worries aren't fundamental or economic. The worry is being underinvested as the market goes straight up.

The way a "wall of worry" works is that market players really don't want to buy at current levels. They don't feel comfortable about the market for whatever reason but when it doesn't pull back, they feel they have no choice but to inch in slowly. They put a little money to work, which drives the market higher and makes them even more anxious about not having enough money invested.

In the current environment, the contrarians keep saying that there is too much bullishness, but what they are missing is that the bulls still have cash and want to buy lower. They are not giddy and chasing. They are grudgingly paying up because they feel as if they have no choice.

That is the dynamic driving this market and holding it up. It will eventually shift, like it always does, but if you are hoping for pullbacks where you can buy, you are likely helping to build that wall of worry even higher.


Jan. 15, 2014 | 10:37 AM EST

Odds Favor Further Upside

  • But the action is so strong it isn't easy to put money to work.

When the market has a reversal day like the one it had Tuesday, the odds favor further upside. The V-shaped move has become the automatic response when there's a one-day sell-off like the one we saw Monday. If you want a sense of the momentum out there just look at the new Four Horseman -- YY Inc. (YY), Canadian Solar (CSIQ), Yelp (YELP) and Jazz Pharma (JAZZ) -- that I wrote about over the weekend.

The dilemma of this action is that it is so strong and so fast that it isn't easy to put money to work quickly enough. You have to be willing to chase, but that obviously carries risk if you don't pick the right names. It is easy to make emotional buys if you are frustrated with being left behind, so it is important to stay selective and disciplined.

I'm working hard to manage positions and I am itching to put more cash to work. It's easy to feel as if you've missed too many opportunities in this sort of market.

On Track Innovations (OTIV), which I added to the Sharkfolio yesterday, is breaking out today on huge volume. I sold down Tesla (TSLA) and Autobytel (ABTL), which I bought yesterday, but both are names I want to add back as they develop. Relypsa (RLYP) is thin but it is one of my favorite charts right now. Zhone (ZHNE) is on my Best Ideas list and I will continue to accumulate it slowly as it develops.


Jan. 15, 2014 | 7:45 AM EST

The Odds Favor Further Upside

  • Doubt and skepticism are punished once again.

The way is long if one follows precepts, but short if one follows patterns.

-- Lucius Annaeus Seneca

Monday's aggressive selling had the potential to trigger a market top, but it turned out to be nothing more than just another bear trap. Anyone who was too negative too quickly found themselves out of position as we regained the bulk of the losses on Tuesday.

In a normal market, a bounce like this may be cause for skepticism, but in the market environment that has existed over the past couple years, these quick reversals have had a tendency to gain further upside momentum. The selling is totally and completely forgotten and seems to only increase the buying anxiety by those who didn't immediately buy the dip. Market players are very aware of this, and they help to keep the pattern going by chasing stocks back up and providing strong underlying support.

These sharp dips and immediate reversals can be quite frustrating for traders who are fast to take defensive action at the first sign of trouble. Sooner or later, this sort of pullback is going to lead to a much sharper correction, and prudence still demands being quickly cautious, although it comes with a high price lately. The buy-and-hold bulls will scoff at the hyperactive traders who are stopped out of positions, but the likelihood is that 2014 will not be so simple and easy for the perma-bulls.

After the bounce on Tuesday, the odds favor further upside. The market is still technically uptrending ,and the selling on Monday can be dismissed as just some healthy profit-taking that helped to alleviate mild overbought readings. The overall technical picture looks pretty good, although we have had quite a few distribution days when we saw pullbacks on higher volume.

With a pretty good technical picture in place, the big question now is whether earnings season is going to be a positive driver or will it produce a sell-the-news reaction. We have run up quite a bit over the past couple months, and expectations are fairly high. Over the past few years, bears have had little luck betting on earnings to drive down the market.

So far, most of the major reports have been from banks and have been OK. Bank of America (BAC) is trading well this morning after beating expectations. The most interesting report this week will be Intel (INTC), which reports after the close on Thursday. An upgrade of Intel yesterday was one of the main drivers for the strong bounce. Obviously, that will increase expectations for its report and makes things a bit more risky. Intel 's earnings have often be a major turning point for the market, although that has not been the case in recent quarters.

So, overall it looks like we are back to business as usual. The bears have been frustrated once again, and the market is working on another V-shaped move back to recent highs. Doubt and skepticism are punished once again.

We have a slight gap up developing and Bank of America is helping the bullish cause. 

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