Until Further Notice

 | Mar 14, 2014 | 4:38 PM EDT
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The good news is that the market didn't follow through to the downside after the pounding it suffered Thursday. The bad news is that it was absolutely dead today. It was probably the slowest day of trading so far this year. We did have a positive bias with breadth running quite strong, but the indices did little and there were very few stocks moving strongly in either direction.

Market players simply didn't want to make any commitments due to uncertainty in Ukraine. It seems obvious what is going to happen there, but the problem is trying to anticipate how global markets are going to react. Europe has been struggling all week over this issue and Asia has been a mess as negative news flows out of China.

We are at a juncture where there really isn't anything to do but to be patient and wait for further developments. Technically, the indices are still holding up, but they are in a precarious position and could easily tip to the downside.

From my standpoint, what continues to be the most worrisome aspect of this market is the lack of leadership. We need generals or hot sectors to lead an upward charge. It can be fairly narrow to start, but good markets tend to have leadership that broadens out as things advance.

There is no question the market is due for a rough correction sooner or later. We haven't had any in a while, and it is necessary to shake out the excesses to give us a healthier market. It can be a very painful process, but we will be better for it. My fear is that we will see a slow drip rather than real panic. The slow drip wears everyone out over a long time and is much harder to trade than a market driven by strong emotions.

The best thing to do is play defense until we have better clarity. While it is certainly possible, we will shrug off this malaise next week. The risk that it could become much worse quite fast requires us to focus on protecting capital.

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

March 14, 2014 | 10:47 AM EDT

Friday Worries

  • Will they turn into a gap-up Monday?

The dip-buyers are thinking about it, but they are a little hesitant so far. What is likely holding them back is concern about headline risk over the weekend. Of course, the pattern has been that Friday worries turn out to be a mistake and the market gaps up Monday, so we may see the buyers step up as they place their bets.

The market is slowly gaining traction as breadth improves to 2-to-1 positive. Gold continues to lead, but there's some bounce in energy and retail. It is routine oversold bounce action, but as we all know, that has had a tendency to surprise as it continues.

As I've discussed, I've raised substantial cash and I am only about 15% long now. My strategy is to pick at a few longs as they come down to support, stay highly selective and keep buys small. I'm more concerned about buying when we sustained upside is more likely, rather than trying to catch a momentary bounce.

One position I'm starting to build is Himax (HIMX). The stock had a good recommendation with a target of $20 last week from Northland and another one from Credit Suisse with a target of $19 yesterday. The weak market has forced it back into its base and I'm going to build it a bit.

E-Commerce China Dangdang (DANG) is another stock that I'm watching, but I have yet to do anything with it. I mentioned the Direxion Daily Junior Gold Miners Bull 3X Shares (JNUG) and the Market Vectors Junior Gold Miners ETF (GDXJ) Tuesday, and I have sold them down into the spike higher today.

My trust level is low but I am optimistic that good opportunities are setting up as weakness plays out. We just need to protect capital, stay patient and watch closely.

March 14, 2014 | 8:38 AM EDT

The Action Demands Defense

  • But stay aware of this market's capacity to quickly recover.

Before everything else, getting ready is the secret of success. --Henry Ford

On Thursday, the market suffered its worst day since the selloff at the end of January. That selloff had many folks, including me, thinking that the action in 2014 was not going to be similar to the straight-up action of 2013.

Of course, that was that was the signal for the market to do exactly what it did in 2013 and rally non-stop in a straight line to new highs. We had endless dip-buying, no real pullbacks and plenty of chasing. It has been 2013 all over again as the action has wiped out the worries that maybe the market might revert to a more normal volatility.

After the selloff over the last three days, market players are once again wondering if we are on the brink of a more dramatic change in market behavior. Normally when they start to worry about such things, the market bounces right back as if there isn't a worry in the world. But this time, there are some legitimate worries in the form of the Russian crisis in the Ukraine and a shift in the way that China is handling the debt problems of underperforming companies.

This market has consistently made bearish worriers feel foolish but, after the action of the last few days, the prudent trader really has no choice but to be more defensive. There really is no choice but to take some steps just in case this turns out to be the time when the selloff gains momentum and the market doesn't bounce right back.

One thing that is rather worrisome is how quickly market players are to declare a pullback of less than 2% as being deep enough to justify a quick oversold bounce. While the action was definitely quite unpleasant for the bulls on Thursday, it was hardly anything extreme. It just felt that way since we have had so few pullbacks of any real magnitude.

That reaction tells us that many folks are really not ready for more severe downside. When it does hit, they are likely to be caught by surprise and will intensify the selling when they try to adjust. I'm not predicting that will happen this time, but the attitude that this market isn't going to correct more than 1%-2% before going on to new highs is a concern.

While the indices have not yet suffered any major technical damage, it is the action under the surface that has been the main worry. As I've talked about for the last week or so, the biggest negative I see is the lack of leadership. We just don't have a group of big-cap leaders that are in charge of this market. We have lost the hot sector groups, namely biotechnology, solar energy and Chinese Internet. The pockets of momentum are extremely small and consist of random names such as Plug Power (PLUG) or Williams-Sonoma (WSM).

It is very easy to make a case for the market going lower, but it is foolish to not acknowledge the propensity of this market to bounce right back and go straight up just when it is on the brink of a breakdown. It has done that dozens of times the last couple years and has burned the bears over and over.

While this action demands that we play some defense, we have to stay aware of this market's capacity to quickly recover. One of these days the pattern will shift and the defensive plays will pay off nicely, but we also need to be ready for a continuation of the recent pattern of immediate improvement.

At the moment, the market is looking to open almost flat and there is very little new news out there.

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