Let Price Action Be Your Guide

 | Mar 06, 2014 | 4:35 PM EST  | Comments
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Stock quotes in this article:

renn

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sgmo

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pxlw

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bidu

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qihu

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sina

,

plug

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ifon

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yoku

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tsl

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sb

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liox

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ljpc

The indices held up well again but weakened in the afternoon. Trading in many of the speculative small-caps was choppy and sloppy. We've seen a surge in "junk" stocks, particularly the China-related names, over the last few days and there was cooling today, but there is still plenty of speculative action.

It feels as if we are in the late stages of this rally, but I maintain that it's better to let the price action be your guide than constantly seek reasons not to like the market. You can make a very good negative argument, but when was the last time that was done in a timely way and paid off quickly?

I continue to believe that the best approach is to respect the uptrend, albeit an extended one, and focus on good stock-picking. There are still plenty of stocks working, but you have to manage things and make sure you take gains when you have them, especially if you are trading the highly speculative small-caps.

A very important jobs report is in the morning, but I suspect bad news will simply entice the dip-buyers to jump in. The bulls are rooting for downside more than upside, which is probably the main reason we keep running straight up.

Have a good evening, and I'll see you in the morning.


March 06, 2014 | 1:27 PM EST

Froth and Complacency

  • But no shift in price action.

It is always a little worrisome when China "junk" stocks are hot, but the bears are always too quick to jump on that action as a contrary indicator. Sure, there is a high level of speculation, but it is a function of too much cash looking for a place to go. What the bears keep struggling with is that despite the frothy action, there's still enough idle cash to keep demand for stocks very strong.

Speaking of speculation, the solar energy group, which has been the best sector so far this year, is leading again with many secondary names like ReneSola (SOL), Yingli Green Energy (YGE), Hanwha SolarOne (HSOL) and Trina Solar (TSL) attracting attention. And secondary China names China New Borun (BORN), Bona Film Group (BONA) and China Precision Steel (CPSL) are popping up as traders dig even deeper for action.

There is some froth and complacency, but still no shift in the price action. We need to be more selective with our stock picks and watch positions carefully, but I don't see any reason to be overly cautious. We are still climbing a wall of worry and that worry is that the market is never going to pull back and let us put money to work at better entry points.


March 06, 2014 | 11:11 AM EST

No Let-Up

  • The desire to put money to work is driving the action.

The market picked up where it left off Wednesday and continues to work higher. Breadth is still solid with about 2,900 gainers to 2,200 decliners, and all major sectors except retail and homebuilders are in the green. Solar energy has regained momentum after a hiccup yesterday, and there's action in precious metals and energy.

There is a fair amount of profit-taking in small "junk" names that have been hot lately, Power Plug (PLUG) and Renren (RENN), but market players are still looking for action and chasing stocks like Sangamo Biosciences (SGMO), Pixelworks (PXLW) and Infosonics (IFON).

Big-cap names are mixed but China continues to run hot and heavy with Baidu (BIDU), Sina Corp. (SINA) and Qihoo 360 (QIHU) leading the charge. Youku (YOKU), which I discussed yesterday, is breaking out very nicely this morning.

I'm seeing some reversals and have sold down some positions, but I continue to look for buys. I added Trina Solar (TSL) and IFON this morning and I have an eye on Safe Bulkers (SB), Lionbridge Technologies (LIOX), La Jolla Pharmaceutical (LJPC) and a few others.

I'm mainly watching for traders rotating out of the high-fliers and into stocks that haven't run as much. There aren't a whole lot, but the desire to put money to work remains very strong and that's driving the action.


March 06, 2014 | 8:15 AM EST

Don't Pretend the Market Is Sensible

  • This is group psychology we're talking about.

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one." -- Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds

One of the easiest things for traders to do in an uptrending market is overthink -- to find reasons it can't continue and anticipate a shift in the action. After all, the goal of trading is to seek out an edge or an advantage, and exploit it. A more difficult task would be continuing to find ways to put money to work -- to embrace what is right in front of us -- but that is what we need to do until there is a shift in the market's character.

But, rather than doing this, we focus on what could happen next. That causes us to miss out on current profits.

The biggest obstacle for many traders is their common sense. They expect the indices to act in a "reasonable" manner, failing to recognize that a market is quite different from the average individual person. We are dealing with group psychology, rather than individual emotions, and here we'll see a much greater inclination to take things to an extreme.

After the run this market has had since the February lows, any reasonable person would think that it is a good time to take a rest -- because that is exactly what a normal person would do. However, the psychology of the crowd is to maintain elevated emotions and to take things even further. Crowds tend to generate strong momentum, and they don't reverse course easily.

The lesson is that you shouldn't overcomplicate your thoughts on what is going on in the market. The indices are trending up on strong momentum, and while it may seem excessive in various ways, there is no reason to believe that stocks will suddenly reverse and go straight down. Markets simply don't act that way, because it isn't the nature of crowd behavior. The only time crowds suddenly stop running in one direction is when some significant event transpires. Otherwise, they tend to reverse slowly and incrementally, and it is quite difficult to pinpoint the exact moment when things may shift in the opposite direction.

The way to deal with this market, then, is to stick with stocks as long as you can -- and back off only when there is some actual change in the price action. It is possible that you may get caught in a sudden reversal. But usually you will have built up so much of a cushion by staying with the trend that losses will be minimal.

The most impressive aspect of this market recently has been the strength of the underlying support. On Monday, when the Russia-Ukraine crisis erupted, there was huge demand to buy the dip. There was no real worry or concern, and when things shifted on Tuesday the underinvested bulls went crazy trying to put more capital to work.

We have a quite but positive start which is usually enough to entice some anxious dip buyers.

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