Nice, but Meaningless, Action

 | Feb 06, 2014 | 4:22 PM EST
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The indices put up good numbers and breadth was better than 2-to-1 positive, but the action had the feel of a routine, countertrend, oversold bounce. Bounces like these tend to be sizable because so many market players are not positioned for them.

In 2013, bounce action like this often led to V-shaped recoveries but, as we now know, 2014 isn't playing out like last year. The conditions that supported those very quick and easy recoveries just don't exist to the same degree now.

The move today creates an interesting setup into the very important jobs news in the morning. Expectations are low due to the bad weather in January but this market is anxious for positive news. The Fed is much less an issue as the focus has turned to economic strength.

I got the sense today that traders are itching to jump back in and gun this market, but that is standard procedure when we are oversold and downtrending. The desire to put money to work often outweighs the fact that the overall trend is still to the downside.

Be ready for fireworks on the jobs news. The action today was nice, but meaningless. Tomorrow will tell the tale.

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

Feb. 06, 2014 | 1:11 PM EST

The Buyers Are Holding Back

  • We're on hold until tomorrow's jobs report.

There is plenty of green on the screens but the action is mild. There's good breadth and plenty of stocks with decent bounces, but only 72 stocks are making new annual highs while 62 are making new annual lows. That is trading-range action and it reflects the slow nature of the action.

Conditions support an oversold bounce but buyers are likely holding back in front of the January jobs news due tomorrow morning. In view of the poor weather in so many parts of the country, most people expect the report to be weak, but the weather excuse rings hollow after you hear it a dozen times.

The real importance of tomorrow's job report is that it is likely to stand alone and won't be perceived as good news or bad news because of how the Fed may react to it. We are moving beyond the "bad news is good news" argument because most everyone agrees that it is not going to do anything to help the economy if the Fed backs off its tapering program.

Many economists agree that quantitative easing did nothing to boost the economy. It certainly helped boost the stock market, but it did little to speed up economic growth. The big issue is how the Fed can exit without causing any major disruption. The market wants tapering and economic growth, which is why the jobs news tomorrow will be so important. Bad news is not going to be good.

I'm looking for buyers to be cautious into the close, although there is sufficient dip-buying interest to keep us green. We are on hold until the jobs news is out.

Feb. 06, 2014 | 10:29 AM EST

The Upside of Downtrends

  • Trading countertrend bounces is different from trading momentum.

We have V-shaped bounce action this morning. It started slowly and is now inching up on good breadth as market players worry that maybe this market might run and leave them behind. I suspect that the jobs news may keep a lid on the upside, but you can see that there is interest in adding long exposure this morning.

I've found that some of the best trading comes from countertrend bounces that occur within downtrends. These moves tend to be quick and sizable. In fact, if you examine downtrends, you will find that almost all the biggest one-day moves occur in a downtrend rather than an uptrend.

Trading countertrend bounces is very different from trading momentum in an uptrending market. In an uptrending market you tend to do well chasing strength while countertrend bounces are more about catching stocks at support levels. You also have to manage things much tighter when playing countertrend bounces and use shorter time frames.

Names I'm looking at this morning are Plug Power (PLUG), which is working slowly higher, and Himax (HIMX), which is at the lower end of its recent trading range. I'm kicking myself for not loading up on Facebook (FB) last night when it sold off on the Twitter (TWTR) report, but that remains one name I'll be looking to add. I expect money to rotate out of TWTR and into FB.

I'd like to get a bit more money in play but I'm staying highly selective. My plan is to keep digging until I find something I like.

Feb. 06, 2014 | 7:54 AM EST

European Rates, U.S. Jobs in Forefront

  • The potential for volatility is high.

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty." --Winston Churchill

 We have some earnings drama this morning from the likes of Twitter (TWTR), Green Mountain Coffee Roasters (GMCR) and Yelp (YELP) but it is European central bankers that are the primary driving force this morning.

The European Central Bank interest rate decision is coming up and it is expected that ECB President Mario Draghi will issue some comforting comments. Although an immediate interest rate cut is not expected, it is likely that the ECB will say that it is willing to act aggressively on the emerging market issues.

That press conference is at 8.30 a.m. EST and should be our initial catalyst. But the market will be looking ahead to the jobs report that is due out Friday morning. Some market players believe that a bad report may actually be good because it will push the Federal Reserve to back off on its tapering program. I disagree with that contention. At this point the market wants good economic news.

Further Fed action is not going to excite the buyers very much. The Fed has been propping up the economy for years now and the market is anxious for it to run on its own rather than through artificial means.

Bad news on jobs Friday is not going to be greeted warmly by the market and I'm a bit surprised that futures are so strong in anticipation of central bank action in Europe. Mario Draghi and his cohorts have had little impact on the European economy and it seems a bit naïve to believe that further rate cuts or other moves are going to have any real impact.

The bigger, and more important, question is whether this market is ready to turn up and gain some traction. We had a pretty good reversal Wednesday, after some panicky action in the morning. But under the surface breadth was quite weak and there was little fear that the market was going to suddenly run away to the upside like it did so often last year. Most of the leading stocks underperformed and small- caps, in particular, didn't look very buoyant.

The most important thing to remember right now is that a day or two of strength isn't going to repair the damage that has been done to this market. We need to hold above recent lows and see a number of strong days on better-than-average volume.  We have had a series of failed bounces and we need one good one to hold before we can put a bottom in this pullback.

In this sort of market environment I like to try to play counter-trend bounces but the important thing is to make sure that you keep time frames short term. You can not afford to let trades turn into investments when the market is still stuck in a downtrend. If a trade doesn't work you have to be ready to take your loss quickly and move on to the next opportunity.

Many market players like to average into stocks in a market like this -- which can work fine as long as you don't do it too fast and too big. Nothing causes more pain then building a big position in a down trending stock that never bounces. If you average down into a position, make sure you have some sort of plan to cut losses should it not come back the way you are hoping.

It is not an easy market environment, especially for those who are counting on a quick recovery like we had so often last year. This market is offering opportunities but we have to work to find them and then manage them well.

We'll see what the ECB does and then the market will focus on Friday's jobs news. The potential for volatility is very high.

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