Big Picture Still Intact

 | Mar 10, 2014 | 4:29 PM EDT
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The market had some struggles today but the buyers managed to shrug much of it off and produced a strong finish.  Breadth was still negative and the majority of big-cap momentum names finished in the red but we did come back from early weakness, which illustrates the strong underlying demand for stocks.

Despite the close, there are still a few worrisome developments. The biggest problem right now is that leadership is narrowing. Facebook (FB) is probably the best-acting big-cap momentum name but outside of that, there isn't much attracting interest.  Tesla (TSLA) has been losing steam and there isn't much else stepping up.

Another issue is that we are losing momentum in some of top sectors. Last week, biotechnology started to stumble and we are now seeing rollovers in solar energy.  China Internet has also weakened, which was another hot group.

Some of the hot money in those sectors has moved into alternative energy names such as Power Plug (PLUG), Ballard Power Systems (BLDP) and a few others, but it's a smaller and much more speculative group.  Outside that, there aren't many themes or groups that are doing much.

There is more weakness in many individual stocks than I'd like to see, but as I've said previously the key to the market is the dip-buyers. When the bounces start to fail, that is when we really have to begin to be more cautious. So far, that isn't happening.  There are some stocks that you might want to dump that are acting poorly, but the big picture is still intact.

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

March 10, 2014 | 1:40 PM EDT

The Action Is Worrisome

  • My concern is that a topping process is developing.

The market has managed to shrug off some of the sluggishness of this morning but the action is still worrisome. Breadth is still running poorly and small-caps are underperforming, but most troubling is that big-cap momentum names like Tesla (TSLA), Netflix (NFLX) and LinkedIn (LNKD) are struggling and some of the big-cap China names have turned as well.

There is leadership but it is very narrow and in highly speculative names like Power Plug (PLUG), Ballard Power Systems (BLDP), FuelCell (FCEL), Hydrogenics (HYGS) and some low-priced names, mainly in the alternative energy or battery group. There is strong momentum, but broader action is needed for a healthier market.

There is dip-buying, so it is tough to be overly negative, but my concern is that a topping process is developing. The key word here is "process," which means we aren't going to go straight down but upside will be limited and strength sold.

It is still too early to make that proclamation, but there are a number of problems with the market action. The dip-buyers are still supporting us, but leadership is the issue that needs to be fixed quickly if we are to avoid more downside.

March 10, 2014 | 10:40 AM EDT

The Market Looks Tired

  • Dip-buyers need to show some gumption.

Perhaps the daylight-savings shift is having an impact, but the market looks very tired this morning. Most of the low-priced junk that has been leading lately, with the exception of Power Plug (PLUG) and Ballard Power Systems (BLDP), is struggling and traders seem hesitant to do much new.

There is broad weakness in solar energy and biotechnology, which have been favorite momentum groups recently. Tesla (TSLA) and a few other big-cap momentum names are weakening, but strength in Facebook (FB) and Twitter (TWTR) are helping to offset that a bit.

As I wrote in my opening post, the action in individual stocks should be your best indicator of overall market health, and my positions are definitely flashing warning signs this morning. My kids gave me a nasty case of the flu over the weekend, which may impair my judgment to some degree, but there is no question of a high level of red on my screens.

A couple things I'm looking at as potential buys are Himax (HIMX), which got a target increase to $20 at Northland, and Yingli Green Energy (YGE), which has contract news. The solar energy group is not acting well, so I'm going to move slowly on YGE.

The dip-buyers need to show some gumption, as my grandmother used to say. Right now, they look tired and disinterested.

March 10, 2014 | 8:35 AM EDT

Let Your Own Stocks Be Your Guide

  • Do not -- I repeat, do not -- focus on big-picture worries.

"It is what you don't expect . . . that most needs looking for." --Neal Stephenson

I often discuss how it is important to stick with the market trend and not to become caught up in the top-calling game. That advice has been particularly important over the last five years, as the market has tended to become increasingly overbought during this period. The vast majority of bears have been burned by constantly betting against the market prematurely.

We all know the market won't run straight up forever, and it can be very painful to be caught too heavily long at a market turn -- so what can we do to protect ourselves when the inevitable occurs?

Your best strategy is to build a cushion of gains. The theory behind the trend-following approach is that you will make considerable gains in the late stages of a run -- more than enough to make up for any losses you might suffer when a turn does occur. As I've often stated, people almost always underestimate how far up, or down, the market can move. They consistently start calling tops far too early, and if they are too cautious, too fast, they miss out on substantial gains.

Even if you are aggressive at sticking with a trend, there will always come a time when you start to feel nervous and cautious. Nothing is more important than keeping your accounts as close to highs as possible, and if you are caught in a reversal, the pullbacks can be daunting, even if you have built up a big cushion.

So how do you continue to respect the trend, even as you also respect the fact that the market can't run up forever? The answer is: Let your individual stocks be your guide.

Don't focus on the big-picture worries. Don't worry about whether the indices are extended, and do not get bogged down in sentiment and other market readings. Simply watch what your stocks are doing. If they start to stumble and pull back, then lighten up. You don't need to make some major market call. You will be timing the market by default.

My style is to make partial sells into strength, and then to sell more as a stock starts to roll over. The sales into strength are often premature in this one-way market, but the approach tends to build my cash levels up quite well when an actual turn does occur.

I bring up this issue this morning because I find that the list of quality stocks has become increasingly narrow recently. We had some problems with the very hot biotechnology sector last week, and most of the strength I'm seeing right now is in lower-quality alternative energy and China-related names. Big-cap momentum stuff is looking tired. That can always shift fast.

The overarching lesson here is: Let your stocks be your guide. If you are in the right stocks, let them run, but use them as an early-warning system as to overall market health.



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