A Good Sign for Active Traders

 | Feb 10, 2014 | 4:26 PM EST
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The indices managed a third straight day of gains but it was sedate action without a lot of anxious chasing. Breadth was marginally positive and there were pockets of action, but overall there was plenty of consolidation, which is exactly what we need at this point.

Since the start of the year, my view has been that the market was not likely to repeat the same patterns of 2013. I expect greater volatility and lumpy bounces. The action today is a good example of how human emotions come into play and prevent the wild chasing that led to so many quick recoveries in 2013.

Ideally, we'd actually pull back and consolidate a bit more, but the V-shaped action is still very much in the minds of many market players, so they are still inclined to pay up rather than miss out when the market is running. Selling into strength in hopes of buying a dip may make sense, but it didn't work as well as perma-bullishness has in the recent past.

What I like best about this market is that the buyers are being selective. Breadth was mixed and that is a sign that the focus is on stock-picking rather than a rush to put money to work. There was surprisingly good action on my screens, even though the broader market wasn't great. That is a good sign for active traders.

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

Feb 10, 2014 | 2:23 PM EST

Building a Foundation

  • No anxiety that the market will run away brings positive action.

It has been a mixed day of action but the bulls have slowly gained the upper hand. Breadth moved higher to 2,950 positive to 2,450 negative, and the indices shrugged off an intraday dip. The averages don't have big gains but just holding steady after the big move over the previous two sessions is a victory for the bulls.

What I find most interesting about the action is that there isn't much chasing, but quite a few individual stock picks are working well. The iShares Russell 2000 (IWM) is flat but I have good small-cap movers. That makes me believe that individual stock picking is working well, although there is probably an element of luck involved.

This sort of digestive action is what the V-shaped moves so often lack. It is much easier to find entries and helps charts develop in a more favorable way. Chasing straight-up moves has been a workable strategy, but finding entries when you are closer to support levels allows for more aggressiveness.

This is very healthy action and I hope the buyers don't start chasing too much into the close. A day of rest without anxiety that the market is going to run away to the upside makes a good foundation for more positive action.

Feb 10, 2014 | 10:45 AM EST

Sedate Action

  • It's just what we want to see after a big run.

We have a mixed start to the week with the indices mostly holding on to last week's gains on mixed breadth. There are good pockets of action as active traders have cash to put to work, but Facebook (FB) and Netflix (NFLX) are pausing.

I've been a net seller this morning because I was lucky enough to see small-caps with good news: Kandi Technologies (KNDI), Power Plug (PLUG), Himax (HIMX), Infosonics (IFON) and Intercept Pharmaceuticals (ICPT). My style is to take partial profits on spikes higher, but I'm inclined to add back to the positions should they continue to hold up later in the day.

Many traders have a hard time rebuying a stock that they recently sold, especially if they have to pay more, but I try to forget the sales I made and focus on whether the stock has room to run. The fact that I sold isn't relevant to that determination. If you practice this often enough, you soon overcome the emotionality that affects the way you think

My Stock of the Week, Tesla (TSLA), is leading the momentum names and continued interest in Apple (AAPL) is helping the indices. The market really needs consolidation, and the way it is acting is very healthy. In the past, there was often an inclination to keep gunning higher, but this sedate action after a big run is what we want to see. I don't particularly like the way the small-cap indices are acting but if breadth doesn't turn down too much, we can handle that. A little profit-taking isn't a bad idea.

Feb 10, 2014 | 7:45 AM EST

A Return to Normalcy

  • The past few years of straight-up bounces are fading into memory.

The four most dangerous words in investing are: 'This time it's different.' --Sir John Templeton

The biggest positive moves in the market tend to occur within downtrends. We saw a good example of that last week as the S&P 500 enjoyed its biggest rally since last October's climb. The big question now is whether this current move will turn into the sort of V-shaped bounce that took the indices to new highs as we closed out 2013.

My contention is that the character of the market has shifted, and that stocks are not going to recover as quickly or as easily as they've done in the past. Many bulls are scoffing at that view after the big straight-up move on Thursday and Friday, but I continue to believe that further upside will be a struggle to achieve.

In technical analysis the general rule has always been that, after a breakdown, stocks or indices don't bounce straight back up. When things fall apart, there are always people who have been trapped, and their natural tendency is to look for a way to escape. If they can do that and minimize the damage, they will sell into strength. That is what overhead resistance is all about.

In addition to the trapped bulls looking for escape, bounces within downtrends always attract bears who are emboldened by the technical break. They will look for short entries into strength, and at key technical levels overhead.

However, since the market bottom in March 2009, this general inclination toward failed bounces and retests of support has been pretty much eliminated. We've seen a few deeper corrections in the ensuing years, but typically the pullbacks have been shallow -- and, even when they are not, the indices just keep on running once they begin to recover.

The most obvious explanation for this change in standard technical analysis lies in the Federal Reserve. The endless cheap money produced by the Fed has had no place to go but into equities. Market players have been very aware of this, so when the market has started to run back up they've rush in so as not to be left behind.

To put it simply, the V-shaped bounces of the last few years are a product of the old adage, "Don't fight the Fed." But, with the central bank slowly starting to exit its accommodative policy, we should see a return to "normal." It was a different for a while but, as Sir John Templeton reminds us, nothing ever really changes in the market. Human nature always asserts itself eventually.

Jane Yellen is due to make her first public appearance as Federal Reserve Chair this week, and we're bound to hear plenty about stimulus tapering and how the Fed will eventual unwind all of the bond-buying it has done.

This aside, the news flow remains quite poor. The jobs news on Friday was ignored by the market, or maybe excused, but it was not positive.

In short, given the changing conditions, be careful about trusting the recent strength to continue as easily now as it did last October. That doesn't mean you should be a raging bear, but don't count on endless buying to bail you out of poor positions. You'll now need to put in much more work to produce exceptional returns -- but the good news is that astute stock picking and disciplined money management will be rewarded.

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