A Pavlovian Market

 | Feb 20, 2014 | 4:23 PM EST
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The ability of the market to bounce back quickly from even minor weakness is truly remarkable. What is even more surprising is how the buying picks up as a bounce continues. There is no inclination to sell into the strength. In fact, there seems to be an even greater desire to buy as these bounces occur.

I attribute this behavior to Pavlovian conditioning. Like a dog that salivates when it hears a bell, market buyers jump in the moment they see weakness. They have been rewarded so often and so consistently for that response that they do it without thinking.

In a market that acts like this it is a waste of time to even consider the valuation arguments that were being made today over Tesla (TSLA) and Facebook (FB). The concern of the market isn't whether the price is fair or not; the issue is whether I can put more money to work.

Although we may not have the Fed pumping in liquidity to the same degree that it was, we still have lots of cash looking for a place to go. For five years the market has run in one direction because there haven't been any good alternatives to stocks for idle cash.

The action today was probably enhanced by market players who were naïve to think we could actually correct for more than a few hours. They should have realized that when it went red this morning, that would trigger the buy response and keep us running all day.

I don't know how much longer this action will continue, but I know I have absolutely no interest in fighting it.

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

Feb. 20, 2014 | 1:11 PM EST

Stick With Hockey

  • There's more action on the ice than in this market.

It's a good thing we have the Tesla (TSLA) and Facebook (FB) news today because there's nothing else to talk about unless you are watching Olympic women's hockey. It isn't bad market action, but it is slow. We are slowly recovering yesterday's losses and breadth has improved nicely, but there's no energy to the buying.

Action like this is caused in large part by the exodus of individual traders from the market. There isn't one left to be very emotional about things. When we have a dip, there isn't any panic. The machines jump in and up we go. Once we start to trend, the machines keep things running in the same direction and make you wonder why you would even consider the possibility that the market could build downside momentum.

I'm sure the buy-and-hold bulls are very pleased with the way the market is fighting back after the weakness yesterday and the poor start this morning. It certainly looks healthy, but if you are looking for action, you probably should stick with hockey.

Feb. 20, 2014 | 10:45 AM EST

Cash Is Burning a Hole

  • But nowhere to put it to work.

The news from Tesla (TSLA) and Facebook (FB) produced headlines and plenty of commentary, but it isn't helping the market much. The action is sloppy, with breadth running just about even. Outside of TSLA, there is little momentum action. Biotechnology is leading, which tells us that speculative action is still alive, but precious metals and pharmaceuticals are showing relative strength, which is where defensive money flows. Banks are laggards, and that indicates nervousness.

The positive spin on this action is that the market needs to consolidate after the big V-shaped run. There is nothing wrong with profit taking. In fact, it is healthy that new holders move in as flippers move out. Things are already firming up as I write. The dip-buyers can't be kept down for long. As long as we don't take out the early lows, it will attract underinvested bulls who continue to look for good entries.

I have cash to put to work but nothing is tempting. I believe SolarCity (SCTY) may be a sympathy play on TSLA since Elon Musk obviously has the golden touch. Kandi Technologies (KNDI) is a good chart and is an interesting play on electric vehicles in China.

I'm going to keep looking for interesting ideas that I can stalk as they develop, but we don't have enough energy to justify jumping in aggressively.

Feb. 20, 2014 | 8:01 AM EST

Getting a Handle on This Year's Trajectory

  • Will the market ultimately act as it did last year?

Adversity reveals genius, prosperity conceals it. --Horace

In 2013, hedge funds had one of their worst years when it comes to relative performance. The market simply was not kind to those who tried to time it. Calling a market top was nearly impossible, and the bounces, following pullbacks, were so fast and furious that it was tough to jump on board. It was a market that rewarded buy-and-hold investing, and punished traders who thought they could maneuver in a timely fashion.

For a while 2014 looked as if it would be quite different from last year. The market struggled to start the year, cracked support in early January and even had some failed bounces along the way. But our old friend, the V-shaped bounce, showed up after a particular ugly selloff -- and it was 2013 all over again.

After a massive eight-session bounce, the market finally paused on Wednesday. There is some weakness again this morning as economic news and the Federal Reserve minutes have reminded investors that the conditions may not be quite the same now as they had been last year.

The big question for us to ponder now is: Will the market act as it did last year, when it had endless support? Or will the shift in big-picture fundamentals give us a bumpier ride?

My contention has been that, since the Fed is no longer providing the same level of support that it did for so long, we should expect the market to act in a more "natural" manner, with a higher level of volatility. That certainly wasn't the case over the past week or so, but this V-shaped bounce seemed more like reflex than anything fundamentally driven. Buyers jumped in simply because it is the pattern that has worked for so long. It didn't much matter that conditions may have shifted. Traders always do what works until they beat it to death.

At this point the key thing to keep in mind is that, when markets go up quickly like this, they don't decline as quickly unless we see some unusual event. The past week's action has created a big supply of potential buyers who will provide support. They'll be discouraged by sessions like the one we saw yesterday, but it will take more than just one day of weakness to shake them. The essence of a market reversal is failed bounces, and so far we haven't even had a chance to see if one might develop.

We have a little extra drama added today given Tesla's (TSLA) earnings beat and news that Facebook (FB) has agreed to buy WhatsApp for $19 billion.

The Tesla report was nearly flawless, and the bears' only hope is that valuation arguments may finally start to matter. Given the high level of short sellers in the name already, it is going to be tough going for the bears.

Facebook's acquisition is facing a barrage of valuation issues, as well. The stock has suffered some downgrades, but the bulls are already talking about how the Google (GOOG) acquisition of YouTube in 2006 was quite similar, and that turned out to be a great bargain in the long run. Facebook stock is a bit technically extended, so it's primed for some "sell-the-news" action, but I don't expect it to stay down for long.

We're seeing some interesting crosscurrents out there, but after a straight-up move a good shake is what's needed to create better trading opportunities. There are always bulls who are only happy if the market goes up every single day, but if you are trader you welcome some volatility, as that is what creates new trades.

Wednesday's reversal and poor close requires a little extra attention to defensive maneuvering, but keep an open mind and don't become too negative too quickly. The bulls have had some strong momentum, and it is not going to disappear without a fight.

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