The Market Isn't Interested in Selling Off

 | Mar 12, 2014 | 4:11 PM EDT
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The indices didn't manage to do much today but under the surface, many stocks bounced back stronger after yesterday's selloff and a gap-down open this morning. My list of high-momentum big caps was nearly 80% green, with some big movers like Tesla (TSLA) and SolarCity (SCTY), while overall market breadth was nearly flat. It was the high-momentum names that did most of the bouncing into positive territory, which helped eliminate some of the negative sentiment that active traders had developed after being hit pretty hard Tuesday.

The big question is whether the pattern of quick and full recoveries will continue. The tendency is for the market to completely shrug off bouts of weakness and go straight up. There are no failed bounces or retests. We simply act as if there is not a worry in the world, which is why the dip-buyers have been so aggressive at doing their thing.

Every time I start thinking that the market may revert to action that is more "normal" and struggle for longer than a day or two, I am proven wrong. Buyers are just too anxious and the fear of being left behind is too great.

The bounce today didn't look very impressive on the surface but there were obvious signs of underlying support and we ended up with a close near the highs of the day. Although many of us would prefer a deeper correction, the market isn't interested in selling off.

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

March 12, 2014 | 1:45 PM EDT

Market Fear Strikes Out

  • It has been undermined by cheap money and robotic trading.

I really should be used to it by now but it is frustrating how the market can't seem to deliver solid downside. The dip-buyers and machines always show up and instead of a good washout that creates great opportunities, we get an immediate bounce that ruins the best potential entry points.

It is a pattern that has seemingly been repeated a hundred times in the last couple of years, but I always scratch my head and wonder what happened to real human emotions. We never see any real fear or panic anymore; it has been undermined by cheap money and robotic trading.

Feeling irritated isn't a very productive emotion for traders, but it does drive home the point that arguing with the market beast is futile. Either you adapt or you miss out. I have a strong bias toward the way the market acted in the days before the Great Recession hit, but it is a brave new world now and the things that drive the market are quite different.

Not only am I whining about this market, I'm also doing very little. My trust level in the bounce is low, although I know very well how often those bounces just keep on going. I still have concerns about the lack of clear leadership and the poor action in small-caps, but the market's job is to annoy us and drive us crazy. That is why it is so potentially lucrative, and why we have to keep working at it.

March 12, 2014 | 10:33 AM EDT

Corrective Action Is Welcome

  • We need things to reset to get new entry points.

A headline about an explosion in New York stopped the first attempt at dip-buying, but news that it wasn't terrorism brought buyers back in and now the market is trading up to the highs of the day. There is still plenty of red on the screens, but breadth has improved and bargain hunting is taking place.

Keep in mind that this market is extremely well conditioned toward buying weakness. I've often referred to it as "Pavlovian," as it seems unthinking and automatic. It's when the bounces don't hold that things really get tough for the market. So far, the dip-buyers have done extremely well and they are going to keep trying until they fail a few times.

I was aggressively selling down positions yesterday, and I started the day with about 15% long and 85% cash. I'm excited that we are finally seeing corrective action; we need things to reset to give us new entry points. It is just a matter of watching and waiting as things develop.

I've been scalping Plug Power (PLUG) intraday for fun and profit, and I don't see anything longer term that I'm interested in buying now. I'm going to try to prioritize ideas so that I can keep focused and move quickly as conditions change, but I'd be surprised if this market doesn't have more downside to come.

March 12, 2014 | 8:31 AM EDT

Negative Sentiment in the Air

  • We need leadership to put market back on track.

A leader is a dealer in hope. --Napoleon Bonaparte

While the major indices remain in their uptrend channel, there are growing numbers of negative developments that warrant a higher level of caution.

In the past the market has done a very nice job of regaining its footing just as negatives begin to appear and traders start to take defensive steps. It seems like the best time to go long has been when Investors Business Daily and trend-following traders start to declare that the market has started to correct.

Despite the market's tendency to bounce back just when it looks as if it is on the brink of something direr, we really don't have much choice but to increase our caution when conditions start to shift like they have the past few days. The purpose of defense isn't to make money but to help us protect the profits. There is nothing more unproductive from a trading standpoint than having to make up losses.

My main market concern lately has been the lack of good leadership. We had some crazy speculative action in fuel cell names like Plug Power (PLUG) and Ballard Power (BLDP) but that group stung the late comers who tried to jump in yesterday. It was ugly and sloppy trading and smacked a bit of desperation by traders looking too hard to find some 'hot' action.

My main concern about leadership is that we have lost the leading speculative groups, such as biotechnology and solar energy. China names, which have been momentum favorites, have turned sharply and there really isn't any good sector leadership now.

In addition to the sector issues, we also are lacking good leadership in individual names. Facebook (FB) has been one of the best big cap momentum names but I'm hard pressed to find many others that are acting well. Tesla (TSLA) seems to be losing its footing, after it blasted higher and other names like Google (GOOG), Netflix (NFLX) and Amazon (AMZN) are rolling over.

Despite the negatives, I'm hesitant to be too bearish as the market seems to bounce back so quickly as these conditions start to develop. It is very easy to overlook the underlying support that never seems to totally dry up. Those dip buyers may step aside at times but they always seem to come back big and strong.

One of the easiest mistakes to make in this market is to underestimate its ability to bounce back quickly just when things aren't looking so hot. Nonetheless there are good reasons to be cautious right now and to make sure you don't let losing positions gain traction. Selling can be a very cheap form of insurance and it is easy to undo with your buy button.

We'll see how things develop but there is negative sentiment in the air and very little positive news flow to give the dip buyer an excuse. They often don't wait for excuses, but until we have a few more pockets of strength I'm not looking for a very strong bounce. We need leadership to put the market back on track and so far there are few signs of it.

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