Enjoy the Pause

 | Feb 12, 2014 | 4:22 PM EST
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It was a slow and boring day but that is exactly what we needed after a wild four-day run. The indices are still a bit extended, but at least there was some consolidation and the frothy action cooled a little.

Healthy consolidation has become a lost art in this market. A few days of flat action allows stocks to rotate from profit-takers to strong hands, which is a good foundation for upside. Too often, however, it keeps running or there's a total reversal. Healthy consolidation that sets up another leg higher has been rare in the last few years.

The run over the past week has not fully recovered all the recent losses. There's still overhead resistance to work through, but in 2013 that sort of resistance never mattered much. If we really have returned to the V-shaped-bounce phenomena, the market won't pause much before a run to new highs.

The good news is that action like this helps quite a bit in the development of better charts, which should assert themselves if conditions hold.

Keep an open mind about the overall market and react quickly as things develop. It is easy to paint both bullish and bearish scenarios right now. I'd give the bulls the edge after the recent run, but I'm not totally convinced that this market is going to continue to act the way it did last year.

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

Feb. 12, 2014 | 10:42 AM EST

Don't Count on Sustained Downside

  • There's too much interest in dip-buying.

I can understand why some traders are anxious to short a market that has moved as big and as fast as this one. It seems logical that there should be some profit taking and a little rest as we digest gains, but shorting extended market conditions has been a very tough trade in the last few years.

What the bears don't seem to understand is that these frantic moves create a big supply of folks anxious to buy weakness. They hate missing out and root for pullbacks -- not so they can short, but so they can buy.

We are pulling back to the day's lows here, but I would not count on sustained downside. There is too much interest in dip-buying to keep the market down for long. If you really want to short this market, wait until a bounce or two fizzles out and the dip buyers lose some confidence.

As I discussed yesterday, I sold down my positions substantially but my holdings still include Intercept Pharmaceuticals (ICPT), Relypsa (RLYP), Research Frontiers (REFR), Infosonics (IFON), Super Micro Computer (SMCI) and Tesla (TSLA). I'll be looking to put more cash to work but I'm taking my time as I fight off the flu.

Feb. 12, 2014 | 8:35 AM EST

A Self-Fulfilling V-Bounce

  • Surprisingly, the market has once again pulled this off.

Mistakes are always forgivable, if one has the courage to admit them. --Bruce Lee

One of the side effects of the straight-up action we have seen over the last four days is that it creates a large supply of people who have missed out and are now anxious to buy on any weakness. These "dip buyers" are likely upset that they weren't aggressive enough before, and now they are looking to jump in even on slight pullbacks.

V-shaped bounces create strong underlying support. The stronger they are, and the longer they last, the more worried buyers will become about getting left behind -- and the more willing they'll be to buy dips.

After the market's recent move, it's due for some rest, but the rally has also created quite a few underinvested bulls that are going to keep looking for entries. These folks are now even more anxious to put money to work, and that is why V-shaped moves tend to become even more V-ish than they had been at the start.

Despite yesterday's levitating action, we didn't see the sort of strong momentum in leading names that often accompanies that sort of move. Strength was broad-based, but it lacked a little vigor. Nonetheless, the fear has now shifted to being underinvested and left behind, and that is going to change the nature of the action. If the typical pattern plays out, this market will not pull back very much from here. Furthermore, the longer the indices hold up, the more anxious the buyers will become.

The key now is to find entry points without buying things that are grossly technically extended. That can be a real challenge after the recent pop, but if you want to put money to work you'll just have to keep digging until you find the entries you want.

I have to admit that, with the market having pulled off another V-shaped bounce, I've been proven wrong about how the action would play out. My thinking was that, without the Federal Reserve providing the same level of support as it has done in the past, a straight-up move would be much harder to do.

However, this action has become self-fulfilling after it has happened so many times in the last few year. Market players fear being left out more than they fear being stuck in a failed bounce. They are now buying V-shaped moves simply because these have become the rule rather than the exception

The market is setting up for a flat start this morning, and the dip buyers seem anxious to jump in quickly. I'll be shaking the bushes for some new buys.

I'm battling a nasty case of the flu, and I am going to be on limited duty today. Good luck and go get 'em.

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