Rise of the Humans

 | Feb 18, 2014 | 4:24 PM EST
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The indices held up quite well after the big run last week, but the most interesting things about the action today was the rotation into smaller-caps.

This move into secondary stocks was reflected in breadth of about 2-1 positive. The DJIA and the S&P 500 did little, but the small-cap indices had solid gains.

This is a good sign for the market as it proves that there are some real buyers trying to put cash to work and they are focusing on picking small-caps to do so. The V-move last week often had the feel of being computer generated as things flew upward with nary a pause. But the action today felt more like humans trying to find good stocks to buy.

The big dilemma of this market now is that the action is still quite strong, but many stocks are painfully extended and don't make for easy entry. There is no simple solution to that problem other than to keep on digging for new ideas. I highlighted a few today like Lionbridge Technologies (LIOX), Super Micro Computer (SMCI) and ChinaCache International (CCIH) that worked well, but it isn't easy to find good setups after the market goes straight up eight days in row.

This market obviously has good support, but you have to be at least a little nervous that we could have some sort of pullback soon. Just keep on plugging away, but make sure you keep a close watch on your positions.

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

Feb. 18, 2014 | 1:37 PM EST

Market Strength Is Broader

  • Buyers are being selective about finding new places to park cash.

The market keeps chugging along with few signs of profit taking. It has gone up so far and so fast that the sidelines are loaded with underinvested bulls shaking the trees looking for entries. That is why smaller secondary stocks are doing much better than big-cap momentum names. The ProShares UltraShort Russell 2000 (TWM) is trading up 1.1% while the PowerShares QQQ (QQQ) is up less than half that amount.

It is a good sign to see the market broaden, which confirms that buyers are being selective about finding new places to park cash. It isn't just machines chasing obvious momentum names like Tesla (TSLA) and Google (GOOG) again.

The trick is deciding how aggressively to pursue charts that look good. Lionbridge Technologies (LIOX) and ChinaCache International (CCIH), which I mentioned earlier, have good volume on breakout moves. I'm also watching Global Eagle Entertainment (ENT) and Daqo New Energy Corp. (DQ). More than 375 stocks are hitting 12-month highs, which means that the strength has broadened. Obviously, things are frothy and we could use a rest, but the big mistake is to assume that the market is going to suddenly fall apart.

Feb. 18, 2014 | 10:25 AM EST

What's on My Radar

  • Looking at three small-caps in this slippery market action.

The little Monday morning gap up is being sold, but breadth is still nicely positive with more than 3,100 advancers to 2,050 decliners. Market players are looking more to small-caps as many of the big-cap momentum names have become extended.

A much weaker-than-expected number from the National Association of Home Builders is causing pressure but the bulls are trying to excuse it based on the poor weather. The weather has been a good excuse lately, but bad numbers are still bad numbers. The selling is picking up as the data are digested and breadth is slipping as I write.

As I noted in my opening post, I'm staying selective with new buys. An example of something I like is Lionbridge Technologies (LIOX), which consolidated over the past week after a good report and is now trying to clear resistance at $7. My stock of the week, Super Micro Computer (SMCI), is another favorable chart that isn't too extended, plus it has very good numbers to support it. ChinaCache International (CCIH) is another chart on my radar.

This market feels a bit slippery and I'm taking it slow, but I suspect that underlying support will remain strong.

Feb. 18, 2014 | 8:02 AM EST

Chasing Won't Work Forever

  • I continue to doubt 2014 will be a repeat of last year.

A well-adjusted person is one who makes the same mistake twice without getting nervous. --Alexander Hamilton

After a seven-session, V-shaped bounce back to the January highs, are the indices now likely to rest?

It sounds like a fairly reasonable course of action, but this market surprised many people last week with its one-way move. Many participants, including myself, thought another sharp V-shaped move was improbable -- but we were proved wrong with an exclamation point.

Even the most optimistic bulls were surprised at how quickly and easily the market bounced after its struggles in the first month of 2014. A big part of the reason for this was that the move was quite lopsided. As a result, it caught a great deal of folks by surprise who, in turn, had to scramble to reposition.

The fear of being left behind was the market's main theme the market in 2013, and that sentiment remained fresh in the minds of many. Over the past year, chasing extended stocks has worked for more often than it has failed, so market players just dove back in and counted on dip-buying support to hold things up.

While I was proven wrong this time around about V-shaped moves this year, I continue to believe the market will evolve quite differently vs. last year as time progresses. The key difference I see is the Federal Reserve's slow exit from its quantitative-easing program, which will eventually remove the central bank as the market's driving force.

Meanwhile, I have been overlooking the price dynamics. The computer programs continue to stick with what has worked -- that is, straight-up moves without a pause. These moves are still self-fulfilling prophecies. While the fundamental factors that helped justify them in the past are no longer as relevant, traders have a tendency to keep doing what has worked for them until they are beaten up badly a few times. Only when they suffer some real pain will behavior start to shift.

The more important question for us to ponder is: How do we deal with the market at this point? The vast majority of momentum favorites are technically extended at this point. That doesn't mean these stocks can't keep running, but it does make them tough to aggressively buy.

The main thing to keep in mind is that this V-ish action has now created a huge supply of underinvested longs who are anxious to buy any weakness. These folks want to put money to work, but many are utilizing methodologies that only allow them to do so on pullbacks or dips. This keeps the dips extremely shallow, and it frustrates the bears, who never seem to give up on the idea of a sudden collapse.

When markets are in this position, my main response is to stay selective and just keep on digging for new ideas. It is very easy to be undisciplined when stocks don't act in a disciplined manner, but chasing doesn't work forever, even when the market makes a move like the one we witnessed last week.

We have a mild positive start to Tuesday's session, and market players seem quite sanguine. Even if you don't trust the market and think it may need a rest, be careful on the short side until there is some weak price action to show that the mood is shifting.

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