No Clear Catalyst for Selling

 | Mar 24, 2014 | 4:22 PM EDT
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It was one of those days where you would be completely misled about the action if you just looked at the DJIA. There was carnage under the surface as biotech and momentum names were dumped with abandon. There wasn't any clear catalyst for the selling, but the momentum money tends to sell first and ask questions later.

What led the market today, and helped to hold up the indices, were big cap names like Procter & Gamble (PG), Wal-Mart (WMT), McDonald's (MCD) and other big-caps that are perceived as defensive names that can hold up relatively well in a weak market. That doesn't mean they will go up, but funds will park money in these names to stay invested and not worry about momentum selling.

Most notable on my screens is how much worse the breadth is than the overall markets. Overall breadth was a bit worse than 2-to-1 negative, but on my screens it is closer to 10-to-1 negative. My screens are mostly comprised of high-momentum stocks and speculative names that have led the market since the first of the year. Many of these stocks were taken out and shot, although some managed to bounce back a bit as the day progressed.

The pattern has been that the market shakes off this sort of selling and comes back very quickly, but I'm not inclined to load up on longs when we have so many breakdowns in stocks that were recently leading. We could easily see another V-shaped bounce, but this action has a different feel today and I'm concerned about more downside action. The big money is obviously rotating, and that is something we haven't seen happen previously.

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

March 24, 2014 | 1:16 PM EDT

This Rotation Signals Trouble

  • But the bulls want you to believe it is healthy.

The market has been undergoing a very dramatic rotation recently. It started as many of the key momentum leaders started to falter. One by one, stocks like Tesla (TSLA), Netflix (NFLX), SolarCity (SCTY) and Amazon (AMZN) have stopped outperforming. We had speculative action in biotechnology, solar energy and China stocks, but the action become more chaotic and the momentum started working in reverse.

Last Thursday we started seeing financials and old technology names like Microsoft (MSFT), Intel (INTC) and Hewlett-Packard (HPQ) gain traction. The banks were moving mainly on stress-test news but the bulls were happy to proclaim this as a healthy rotation into "value" names, as many stocks became quite frothy.

The bulls fail to appreciate that this sort of rotation is always a sign of trouble. First, financials are almost never a good leadership group. They trade primarily on interest rates and the yield curve, and what is good for them is usually not good for growth stocks. Even when financials are trading well, they have lower betas and other stocks move much more aggressively. Banks simply don't lead the market for long.

Second, rotation into value names is generally caused by mutual funds that must stay heavily invested at all times. They rotate into things like MSFT not to produce outsized returns but to produce relative performance in a weak market. It doesn't matter if they actually lose money as long as they don't lose it faster than their benchmarks.

In the world of money management, all the really matters is relative performance. Losing money isn't a sin as long as you outperform your index. That may be nice for fund managers, but people like me don't have to be invested all the time. I have no fear of holding cash, and I find it preferable to fooling around with defensive names that may hold even if you are lucky.

This market is undergoing a very tough rotation that the bulls want you to believe is healthy. It may indeed be healthy as we need to wring out excesses, but you aren't going to make much money trying to buy defensive names exhibiting relative strength today.

March 24, 2014 | 10:40 AM EDT

Cash Looks Good

  • Buyers are holding back, which is a change in market character.

The indices aren't doing a good job of reflecting it, but the action is ugly. Momentum stocks, in particular, are being pounded, with Tesla (TSLA), Twitter (TWTR), LinkedIn (LNKD), Amazon (AMZN), Google (GOOG) and Netflix (NFLX) all seeing substantial pressure. China names are being hit hard, and biotechnology is being slammed for a second straight session.

Basically, all the stocks that have led the market this year are being sold while money moves into bigger cap, conservative and defensive names. This is why the DJIA is exhibiting relative strength. Oil and chips are leading while gold, biotechnology and solar energy lag.

Usually when we have this sort of selling we see very quick reversals as dip-buyers go after the momentum names like TSLA and GOOG. Those are usually the first stocks to attract the hot money looking for a bounce, but the buyers are holding back today, which is a change in character.

I'm being stopped out of positions and not trying to do any buying so far. I've been trading the Direxion Daily Small Cap Bear 3X Shares (TZA) and I will look for entries as it develops. Right now cash is looking good. This action has a very different feel than other dips and I'm not as optimistic we will shrug it off as quickly as we have previously.

March 24, 2014 | 8:07 AM EDT

It Simply Hasn't Paid to Worry

  • One day that'll change, we do need to keep this in mind.

"The reason why worry kills more people than work is that more people worry than work." --Robert Frost

For years now, the most unproductive thing for an investor to do has been worrying about the health of this market. Nonetheless, the fact that there have been so many good reasons for concern has seduced many of us to constantly look for a market top -- and, time after time, the market has shrugged off the negatives and has just kept running higher.

Yet more good reasons to be worried have surfaced in the past couple weeks. We have the crisis in Ukraine, economic issues in China and hints from Federal Reserve Chair Janet Yellen that interest-rate hikes are coming sooner rather than later, as well as a lackluster economic recovery in the U.S.

In addition to the macroeconomic issues, we're also looking at some technical warning signs. My No. 1 concern right now, as I've often mentioned of late, is the lack of leadership. On Friday the key biotechnology and medical groups fell hard as issues about drug pricing took hold. Biotechnology, which had been a leader for quite a while, had already been slowing -- but the action on Friday was particularly brutal.

Beyond that, the market has steadily been losing the key pockets of momentum for a while now. China stocks have been dropping, solar energy is weakening and, while a few names have popped here and there, the hot stocks have narrowed and are lacking in quality. For an aggressive trader seeking action, lots of landmines remain.

Last week we saw some movement in financials and old technology names, such as Microsoft (MSFT) and Hewlett-Packard (HPQ), but this looks more like a defensive move as concern grows over the flagging leadership -- and defensive stocks do not lead the broad market higher. When we see spiking in such stocks as Wal-Mart (WMT) or AT&T (T), it means big funds are trying to put money in something that may not go down as quickly as the broader market will.

What makes this market so tricky is that every time a number of negatives align, the market seems to shrug them off and punish anyone who has become too defensive too quickly. Caution has cost market players a lot of money, so folks have learned to ignore warning signs, even when they may seem quite persuasive. It simply hasn't paid to worry.

My primary advice for quite a while has been to avoid anticipating a market top and to allow the price action guide you. But even that advice has not worked very well, as the poor price action never seems to gain any momentum: Just when it starts to look troubling, the market will find its footing and we are forced to chase once again.

That is where we are now. The price action is weakening, and there are troubling signs out there. It makes sense to be more defensive, but this is where the market continues to confound prudent traders, turning back upward as if nothing at all has happened.

So I'm worried about this market, and I am inclined to hit the eject button. However, for years now I've seen the indices recover from positions like these quickly and consistently, and I have to keep that in mind.

One of these days we know that a real correction will kick in -- and, at that point, being defensive will pay off nicely and quickly. But, again, trying to time a major market top has been investors' single biggest mistake for five years now.

This morning is showing a mixed start on weak China data. Buckle up -- it's looking like a bumpy ride.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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