Levitating on Air

 | Feb 11, 2014 | 4:21 PM EST
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The action today was a textbook example of what is known as a market "melt-up." The indices had already made a big run over the last three days and were faced with technical resistance, but they flew higher in a straight line all day. Volume was light and there was little quality leadership but breadth was good and stocks levitated on air.

Action like this catches many folks by surprise and rather than fight it, they chase it out of fear of being left behind. Too often, the market has continued to run up even more when it seemed to be at unsustainable levels.

As a momentum trader and trend follower, I try not to call market tops, but when we run like we have the last few days, it really isn't possible to put new money to work. If you lock in gains, then you will end up being less invested. So while I don't call tops I end up timing the market to some extent due to the way I manage individual positions.

If the 2013 script repeats, we are going to keep on running until we see new all-time highs, but even the bulls have to admit we need a rest after the bubbly action today. This market is strong but that doesn't necessarily mean that it's healthy and buyable right now.

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

Feb. 11, 2014 | 1:35 PM EST

No Market for Active Traders

  • It feels like the machines are driving the action.

My thesis that a low-volume, V-shaped bounce would not likely occur is being proved wrong. The market is running on air and you can sense the frustration of underinvested bulls and overly aggressive bears as we go straight up, as if there isn't a worry in the world.

What is always amazing about these moves is that they tend to come on declining volume and without any real excitement among retail investors. It feels like the machines are driving the action.

As I mentioned earlier, I have sold down my positions substantially into today's strength. I did so primarily to clear my mind and to reset my trading. I am not making a market-timing call, although it certainly is not easy to do much buying at this point. The fact that I have the flu is probably influencing me to some degree, but I'm not too concerned about my decision to sell positions.

If you are holding high levels of cash, all you can do is keep digging for new buys. Not everything will be extended and without support, although there will be few easy entries. One of the most frustrating things about the market in 2013 was the lopsided action that pushed overbought markets to be even more extended. That is great if you are buy-and-hold investor, but the opportunities dry up very quickly for active traders in action like this.

A good market is one that offers many new opportunities. This market is offering almost no new opportunities.

Feb. 11, 2014 | 10:33 AM EST

Moving to the Sidelines

  • Going to cash lets me regain objectivity and pursue new trades.

The market is holding up well as we hear from Fed chief Janet Yellen but I'm using this strength to sell down positions substantially. I'm not making a market-timing call, simply looking to clean house and reset after a good run. I have accumulated quite a few small positions that aren't doing much and I want to remove clutter. Even if some sales don't prove timely, it helps me mentally to dump baggage and have a relatively clean slate.

Traders need to be aware of how their emotions affect their trading. For me, going to very high levels of cash periodically allows me to regain objectivity and to be more aggressive in pursuing new trades. I have a touch of the flu and that is probably affecting my mood as well, but I find it energizing to clean out my holdings.

Overall, the market continues to act well. It is obviously becoming a bit extended going into a fourth day of bounce action. The market seems to be looking for Yellen to keep us running, but there isn't much she can say other than she plans to keep the current Fed policy in place.

I'll be looking for new buys after I clean out my portfolio and I may actually end up buying back some stocks I have sold. For now, I feel quite satisfied moving mainly to the sidelines.

Feb. 11, 2014 | 8:20 AM EST

Navigating Through the Yellen Testimony

  • Watch for a 'sell-the-news' reaction in particular.

When policy turns from more accommodative to more restrictive, that's going to be a market-sensitive event. It always is. -- Janet Yellen

After a very feisty three-session bounce, the big question today is whether new Federal Reserve Chair Janet Yellen can keep it going. Dr. Yellen is scheduled to testify before the House Financial Services Committee this morning. Her prepared remarks will be released at 8:30 a.m. EST, and the hearing is set to begin at 10 a.m.

After Friday's poor jobs report and the market's quick recovery after that release, there has been talk that maybe the "bad news is good news" reaction still makes sense, as Yellen is likely to lean toward the dovish side. However, there is little indication that the Fed will back off from tapering its bond-buying program. The market will be listening very carefully for any signs that the central bank might be inclined to move back toward its accommodative posture.

But if Yellen's testimony reveals a more dovish Fed due to concerns about a slow recovery, it is very unlikely that the market would celebrate this. Folks are ready to move on, and if Fed policy isn't working now, why would we believe that more of the same will make much of a difference? Many economists question how much impact quantitative easing has had -- so, if the Fed is forced to do something, it is likely to try new policies.

So the market will be intently focused on Dr. Yellen as a possible catalyst, but the good news is that the action in individual stocks has been quite good. The three-session bounce didn't have the feel of being as highly machine-driven as it has in the past. Breadth was quite mixed, and that's a sign that traders are focusing on stock-picking and not just highly correlated, big-picture movement.

While Monday's action was a continuation of the oversold bounce, the buying was not as reflexive. Also, there was a mix of leadership -- stocks like Tesla (TSLA) were still running -- while the hot money ignored other key names like Facebook (FB).

This all seems to support my recent thesis that the character of the market is shifting. As I've often said, we are unlike to see the same sort of V-shaped bounces we've seen so often over the last couple years.

We need to watch carefully for a "sell the news" reaction to the Janet Yellen testimony. The market has probably been anticipating something friendly from her, but she really doesn't have much flexibility at this point. The Fed has to continue to taper, or it will be forced to admit that its policies have mostly failed in stimulating the economy.

But, given the promising action in individual stocks, if we stay selective we should be able to navigate through the Yellen testimony. In fact, a pullback at this point would be technically healthy as long as the market manages to hold well above recent lows.

With earnings season mostly over, there isn't much news on the wires. Overseas markets will positive across the board, and the market is set to gap higher as we await Dr. Yellen's prepared remarks.

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