Market Chaos Theory

 | Mar 21, 2014 | 4:11 PM EDT  | Comments
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Stock quotes in this article:

msft

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hpq

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ibm

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tsla

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FB

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goog

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biof

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astm

It is often said that choppy and inconsistent action is an indication that the market is forming a top. If that is true, then we have something to worry about. It has been an extremely chaotic market this week, with peculiar rotations, odd selloffs and unusual strength.

Even the most notable news events -- the Russian annexation of Crimea and Janet Yellen's first press conference as Fed head -- produced chaotic action. We rallied to start the week on the Russian news and then danced around as pundits debated whether Yellen made the mistake of being too clear when she talked about when interest rates might rise.

What really sealed the deal for oddball action was leadership from old technology names like Microsoft (MSFT) and Hewlett-Packard (HPQ). The explanation given was that money was moving to safer names after a little too much froth in the IPO market, speculative biotechnology and lots of junk China and small-cap names.

That probably is a good explanation, but the problem is that those stodgy technology stocks and financial names are not going to provide the sort of leadership that takes the market higher. Funds buy those stocks because they feel they have to stay fully invested. Aggressive traders and hedge fund managers will go to cash or even short rather than load up low-beta big-caps.

I've been complaining for a while about how we have not had good leadership. Names like Tesla (TSLA), Facebook (FB) and Google (GOOG) have lost energy and we need new growth names to emerge to act as leadership. Plus, the speculative sectors -- biotechnology, solar energy, China Internet and alternative fuel -- have lost their energy.

Technically, the market is only a small percentage off recent highs, but there are signs of topping behavior and a higher level of caution is needed. I'll still be looking for action in small names, but it's becoming thinner and choppier.

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


March 21, 2014 | 10:53 AM EDT

Out of Breadth

  • Today's obvious rotation reflects worry about froth in the market.

Thursday's odd action continues with the rotation out of the hottest groups, particularly biotechnology and solar energy, into "safer" and "cheaper" names.

Breadth on the NYSE is running better than 2-to-1 positive as conservative names lead, while Nasdaq has slightly negative breadth. Breadth on my screens of high-momentum names is a deep, dark red. It is obviously a rotation, but it reflects worry and concern about froth in the market and isn't the sort of thing that produces sustained upside.

I've been forced to take stops and lighten positions. This market is not being friendly to the sorts of stocks I favor, and there is little choice but to get out of the way and wait for support to kick in.

A couple small stocks like BioFuel Energy (BIOF) and Aastrom Biosciences (ASTM) are still working, but I'm primarily a seller into strength.


March 21, 2014 | 8:48 AM EDT

Focus on What Can Work

  • It has been more productive than looking for what might go wrong.

"Lead me, follow me, or get the hell out of my way."

--General George S. Patton, Jr.

After a slightly hiccup following Fed Chair Janet Yellen's mistake of being too clear about the timing of interest rate hikes, the market regained its footing on Thursday. However, it was a peculiar day of action -- the financials led, as they anticipated stress test results, and "old" technology names, including Microsoft (MSFT), Hewlett-Packard (HPQ) and IBM (IBM) moved strongly.

Under the surface, volume was mixed, breadth was flat and small caps lagged but it was covered up by the action in banks and old technology. The biggest negative was that the stocks that normally lead did little and the pockets of momentum were quite thin.

In a normal uptrending market there usually are some key leadership groups and some big cap names that will stand out. For example during the big jump in February we saw biotechnology and solar energy led the market higher. Key stocks, such as Tesla (TSLA), Facebook (FB) and Google (GOOG) were the big-cap leadership names.

Over the past couple weeks we have lost the key leadership. Biotechnology and solar energy have cooled off and the big-cap names have been quite mixed. We have had a little speculative action in some of the alternative energy names like Plug Power (PLUG), Quantum Fuel Systems Technologies (QTWW) and BioFuel Energy (BIOF), but there hasn't been any stand-out action until the financials jumped yesterday.

The question for us to ponder is this: Is the market simply undergoing a rotation into a new group of leaders that will take it higher? That does occur on a fairly regular basis but, typically, financials and stocks such as MSFT don't last very long as market leaders. Either new groups emerge and overtake the financials or the overall market falters and starts to correct.

My primary advice for a long time now has been to not try to anticipate a market turn but to stay with the trend as long as possible. It has been much more productive to look for what can go right rather than to focus on what might go wrong. I am concerned about this one-day shift in leadership but it may be nothing more than a temporary blip.

What continues to be most impressive about this market is the underlying support. Rather than build on the poor reaction to Yellen's comments following her press conference on Wednesday, the market focused on why it didn't matter and found good reasons to buy again. If higher interest rates can't scare the market, then nothing will.

While we can find things to worry about, there are still no major flaws in the price action. I will continue to look for pockets of momentum and stay with them until they stop working. I have a strong bias for some sort of market correction in order to shake things up. But the market doesn't care what I want so, to make money, we take what it gives us.

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