A Market Made of Teflon

 | Feb 28, 2014 | 4:38 PM EST
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After a slow but steady upward trek all week, we were finally hit with some profit-taking, although the DJIA and S&P 500 covered it up quite well. It was the stocks that have been leading lately, particularly the biotechnology names and some of the momentum plays like Tesla (TSLA), that bore the brunt of the selling.

The main catalyst was news that Russian troops have entered Ukraine to safeguard its ports on the Black Sea. The market sold off fairly quickly as the news hit but bounced back sharply into the close. End-of-the-month window-dressing and fear of being left behind seem to be more powerful than any problems created by Vladimir Putin.

Many market players were surprised that there wasn't greater defensive action out of fear of more bad news over the weekend, but this market has been made of Teflon and sellers usually regret being too defensive too quickly.

It will be interesting to see what news develops over the weekend, but the trend of this market is certainly strong and it is going to take more than just a few selling blips to stop the momentum. I 'd like to see more downside action to give us better trading, but wishing for things to go lower just hasn't worked well.

Have a great weekend. I'll see you on Monday.

Feb. 28, 2014 | 10:35 AM EST

No Easy Entries

  • But no reversals, either.

The market is picking up where it left off yesterday and chugging steadily higher on 2:1 positive breadth. The predominant emotion is, "I'm being left behind and have to find some way to put money to work." Of course, the market isn't going to give those underinvested bulls a break and conveniently pull back a little.

Other than precious metals and homebuilders, all the major sectors are in the green again. Oil, biotechnology and solar energy lead. In the big-cap group, Apple (AAPL) continues to bounce but it remains sedate. Tesla (TSLA), Baidu (BIDU) and Netflix (NFLX) are taking a break.

The hottest action on my screen is E-Commerce China Dangdang (DANG), which has been called the Amazon (AMZN) of China, but it has been a disappointing stock for many years. It has a very hot initial public offering in 2010, but it has not done anything since then. It is now coming to life and the momentum money is pouring in. I expect this to remain a good trading vehicle for a while. Renren (RENN), which debuted at the same time as DANG and has acted similarly, may be a possible sympathy play as traders look for other ways to play DANG.

Plug Power (PLUG), Intercept Pharmaceuticals (ICPT) and 58.com (WUBA) look good technically. Kandi Technologies (KNDI), my stock of the week, is hitting new highs this morning.

There aren't many easy entries but there aren't many reversals, either.

Feb. 28, 2014 | 8:12 AM EST

Demand Outstrips Supply

  • There is still abundant cash with few places to go but into equities.

"The past is not dead. In fact, it's not even past." -- William Faulkner

As we wrap up the second month of 2014, the market is behaving much like it did in 2013. In fact, the V-shaped move off the February low was even bigger and faster than the V-shaped bounces we had last year.

As is the tendency after such a move, we hold up extremely well as the underinvested bulls and dip buyers provide support while they seek entry points.

The market's weak action in January had many market players, including me, thinking that the nature of the market has shifted. With the Fed being less of a factor, it appeared that we might not see the same level of support. The mistaken assumption was that the level of liquidity was somewhat diminished. The recent action of this market made it quite clear that there is still abundant cash with few places to go but into equities.

Ultimately the stock market is nothing more than an exercise in supply and demand and what we have seen repeatedly the last few years is that there is too much cash chasing too few stocks. While there have been a fair amount of IPOs and some increases in market cap, there is just an overwhelming flood of cash that can't seem to find a home.

The bears consistently make the mistake of thinking that a high level of bullishness means that there is little idle cash on the sidelines. That sort of contrarian logic has not worked at all because even the most aggressive bulls seem to have a hard time putting cash to work.

This surfeit of cash can be seen regularly in the high-momentum names. Many become extremely overbought, yet they continue to be chased because there is a limited supply of them and there just don't have many other choices.

This tendency to keep chasing is extremely frustrating for bulls, who focus on fundamental valuation. They constantly have to decide between chasing momentum or waiting for dips and more attractive entry points. The dips are bought so fast that they never really materialize, so there is little choice but to keep chasing to put money to work. The end result is new highs like the S&P 500 made yesterday.

The bears that keep looking for a market top don't seem to understand the nature of the underlying demand for stocks. They think all the normal negative arguments will eventually have an impact, but they don't appreciate that the most important consideration for many is simply putting cash to work.

Weakness is an opportunity, not a warning sign.

And so we wrap up February sitting on new highs and with plenty of underlying support to keep us there. Logically and emotionally a little rest would make sense at this juncture, but for the underinvested bulls that is simply an opportunity to rush in put some of that idle cash to work.

We have another slow start but the pattern is that we heat up quickly. There isn't much news flow and not much movement.

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