Resistance Is Futile

 | Feb 14, 2014 | 4:05 PM EST
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After six straight days of gains on declining volume, you might think it reasonable for the market to rest a bit as it runs into resistance at all-time highs. But being reasonable isn't going to make you money in this market. It is levitating on air and the only fear is the fear of not having enough long exposure. The fact that the indices have gone up without a pause is totally irrelevant to buyers right now.

I have to admit, I'm tired of writing about the market's inclination toward V-shaped moves, but it is a pattern that isn't going away easily. In fact, the present move seems to have surpassed a number of the ones we saw last year. The action in January had me thinking that the character of the market had finally shifted, but February has proved me very wrong.

So what do we do now?

If you study the V-shaped patterns, what should be very clear is that markets don't just suddenly reverse and go straight back down. Typically, there's some stalling but conditions will hold up well for quite a while before any notable pullbacks kick in.

You are generally better off if you just stick with a long bias until there is some negative price action. Trying to anticipate a top is a killer in this sort of market. I'm sure legions of bears were convinced the market couldn't pull off another day like this.

It is very easy to complain about a market that acts in such an illogical manner, but complaining doesn't make us money. We need to find ways to navigate this lopsided action and the way to do that is stick with a bullish bias even though it may offend your common sense. Look for reasons to like this market rather than question it.

Have a good holiday weekend. I'll see you on Tuesday.

Feb. 14, 2014 | 10:33 AM EST

Dip-Buyers Lose Patience

  • They just can't afford to wait for red.

The debate this morning is whether the market will pull back and consolidate or keep running, fueled by overanxious dip-buyers. The bulls' biggest frustration after the recent action is how to put money to work. If you wait for a dip you may never see one, and if you pay up you are likely buying stocks that are technically extended. It's foolish not to be bullish when the market is this strong, but it isn't easy to be aggressive.

It looks like the dip-buyers have grown impatient again and are pushing the market to new intraday highs. In this environment, a "dip" is nothing more than a pause in the uptrend. Buyers just can't afford to wait for red.

Breadth is running close to flat and action is mixed, but the stock-pickers are finding opportunities, and that is helping to keep the mood upbeat. Fear of missing out continues to be the main driving force.

I added new position this morning, Fonar Corp. (FONR). I highlighted the stock a couple of weeks ago and it surprised traders today with an earnings release just as the market opened. There are no analysts covering it and there is a big short position, so I'm looking for it to run.

Feb. 14, 2014 | 7:50 AM EST

In the Same Place Once Again

  • Embrace V-shaped moves and don't anticipate failure.

Repetition of the same thought or physical action develops into a habit which, repeated frequently enough, becomes an automatic reflex. -- Norman Vincent Peale

After two failed bounces in January that had many folks, including me, thinking that a V-shaped recovery was unlikely, the Nasdaq has run 7% straight up and is on the brink of making a new high. It is a classic V-shaped bounce just like we have seen numerous times in the last couple years.

Many market players are back in the familiar position of being underinvested as the market goes straight up and makes new entries extremely difficult. This is the action that caused the hedge fund industry to have one of its worst years of relative performance. Market action like this favors the buy-and-hold crowd who doesn't question the wisdom of the market but stays steadfast in the belief that the negatives won't matter.

What has been a bit different about the bounce this time is that it has come without any obvious positive catalyst. Some have attributed the move to Janet Yellen's testimony earlier this week. Others have talked about the fiscal cliff deal that was reached by Congress, but those haven't been surprises. What is interesting is how the market is excusing a steady diet of poor economic numbers. The bulls blame the weather for the misses, but there still are few signs of any real economic growth.

What we have learned the last few years is that it is impossible to time the market based on fundamental issues. There was never a time, during these V-shaped moves, when you couldn't make a compelling argument against the market on a fundamental basis. I wrote many times to just ignore the arguments until there was some negative price action to back them up. And here we are once again in the same place.

The way to deal with these V-shaped moves is to try to embrace them as long as you can and don't anticipate that they will fail. It might not be easy to find new buys but it sure beats trying to fight the momentum with a short bias. The natural inclination of many market players will be to try to time a top now, but it usually is more profitable to be reactive rather than anticipatory.

This sort of market action causes much frustration for traders who try to time the market. It seems very illogical to many and it is extremely easy to find yourself poorly-positioned when we fly higher without any clear reason.  

We have a mild start to the day as better-than-expected economic news in Europe is keeping a bid under the market. Consumer confidence numbers are coming up and that should give us a little shake.

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