Building a Foundation

 | Mar 25, 2013 | 4:22 PM EDT
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For a while this morning, the bulls were ready to run on a "Cyprus is saved" headline. We did hold up for a while, but then some second thoughts kicked in, and then the Dutch financial minister made the mistake of saying the same approach used in Cyprus could work in other countries as well. He tried to back off from his comments, but the damage was done and the market struggled the rest of the day.

The action felt much worse than it looked because of the intraday reversal from a near-record level for the S&P 500. Small-caps in particular looked quite strong in the early going, but many reversed hard, and that triggered sell stops and profit-taking. I was still impressed by the strength in a number of stocks that I mentioned, such as Sinclair Broadcast Group (SGBI) and Sarepta Therapeutics (SRPT), but it remains quite a challenge to put much new cash to work.

While the action wasn't too hot, it wasn't bad enough to change the overall picture. We are still in the same uptrend that we have been in all year and have yet to breach any key technical levels. Momentum has slowed the past week or so, but the positive spin is that we are just consolidating and building a foundation for more upside. The bears will argue that this is a warning sign and the start of a topping process, but so far that is more hope than fact.

Once again, I remind you that the easiest mistake to make in this market is to be too bearish too quickly. We have a tendency to regroup and resume positive action just when it looks like we are ready to fall apart. While today was not very positive, it wasn't bad enough to justify a high level of negativity.

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

March 25, 2013 | 1:35 PM EDT

Perhaps Cyprus Matters After All

  • The mood has definitely turned sour and the market is sinking.

We have quite the mood swing out there as market players decide that it really isn't such a good thing for banks to seize the funds they have been entrusted to hold. The Cyprus deal is a negative no matter how it is structured, but market players were hoping that we could put it behind us and move forward. If it can happen in Cyprus, why not Greece or Spain?

The mood has definitely turned sour now and the market is sinking steadily. Breadth was holding as small-caps outperformed, but they could not withstand the pressure and the market is closing in on three losers for each gainer.

I was kicking myself for some premature sales this morning but now I'm kicking myself for not selling more. Dip-buyers are standing aside and profit-taking is picking up as folks protect recent gains. I'm tightening stops on what I'm holding and giving myself a little more room, but this slow drip lower is definitely taking a toll on many positions.

Stocks such as Manitex (MNTX), Sinclair Broadcast (SBGI), Sarepta (SRPT) and Goldfield (GV) are holding up but I've cut back on them.

March 25, 2013 | 10:39 AM EDT

Small-Caps Are Running

  • This action reminds of me of the old days.

The Cyprus deal is receiving the credit for the market strength this morning but I suspect that it is more a function of frustrated bulls afraid of the market running away from them again. They are trying to catch up and feel they have little choice but to chase.

The small-caps on my screens are performing particularly well. Sinclair Broadcast (SBGI) and Consumer Portfolio Services (CPSS), which I highlighted this weekend continue to run, and many other small stocks like RF Industries (RFIL), Manitex (MNTX), ACADIA Pharmaceuticals (ACAD), Radian (RDN), Goldfield (GV), Insmed (INSM), Hovnanian (HOV), Himax (HIMX), Santarus (SNTS) and Sarepta (SRPT) continue to do very well.

This sort of small-cap action that rewards good stock picking reminds of me of the old days before the 2008-09 crash. Traders are gravitating toward the best action and they are keeping things running. For some reason it doesn't have the artificial stench of the machine-driven trading, which makes it much easier to trade.

I've sold down a few things into this strength but I'm sticking with the trend and trying to find more entries.

March 25, 2013 | 8:25 AM EDT

Why Cyprus Doesn't Matter

  • The bulls still want into this market.

I believe that banking establishments are more dangerous than standing armies. --Thomas Jefferson

Cyprus' place In the European Union has been preserved and the market is celebrating. The fact that they are stealing bank deposits, primarily from Russians, to do so doesn't seem to be of too much concern. The only real concern of the market is that the European Union isn't falling apart. It seems that they are paying a very high price for this by undermining the integrity of bank deposits, but the market is unconcerned about that so far.

The issue now is whether lifting the Cyprus cloud will put the market back on track to continue higher. Overall, the market never really was that concerned about Cyprus. It had flat action and held steady last week, which was disappointing to some bulls after the steady climb enjoyed so far this year. But, overall, you really couldn't say we had much of a correction. If anything, it was just healthy consolidation after a big run and is positive technically.

The bulls are optimistic that the market can keep trending higher as the European Union issue is dealt with and, more importantly, the end of the quarter attracts window-dressing. It has been an exceptional strong quarter and there will be pressure to on to gains for the remainder of the week and paint a pretty picture.

While the indices still look quite healthy, there certainly are a lot of complaints from both bulls and bears. Obviously, the bears can't gain any traction. They may have one good day here and there, but anyone trying to short this market aggressively has had major problems.

What is less obvious is how frustrated many bulls have been. This market has made entry points extremely difficult and many market players are having a very hard time finding sufficient long exposure. Ironically, this is probably a big reason why the market has stayed so stubbornly strong. The bulls still want in and they are quick to do buying on any weakness. It is why the Cyprus crisis really didn't have any lasting impact last week.

The easiest thing to do now is predict that this rally is going to end. There are lots of good reasons, technically and fundamentally, to support such a view but the one great lesson of this market for a very long time is not to be overly negative until there is real price weakness.

Many people can't resist trying to fight a trend like this but it has been very costly to do so. The way to make money in this market is to keep riding the trend as long as you can. You have to be very selective with your stock picks and manage them closely, but staying bullish is the way to go.

I suspect many market players are looking to fade this early strength. The whole basis for the strength seems unjustified and I'm looking for the bears to fight the move, but I'm sticking with the bulls until I see a good reason and real weakness to support a different view.

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