What a Mess

 | Mar 26, 2014 | 4:13 PM EDT
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It has been rather annoying how the DJIA and S&P 500 have covered up how poorly this market has been for nearly a week. Today the mood shifting as the senior indices reversed hard after a positive open and then suffered accelerated selling into the close. It was obvious that the big-caps just couldn't withstand the onslaught of selling that has been plaguing the bulk of the market since last week.

It has been my contention lately that the rotation into financials and defensive names was not positive and did not bode well for the overall market. That action did help to hold up the indices, but we are probably better off if they start to reverse and confirm what has been occurring under the surface. The best way for us to see a good tradable low is if the DJIA and S&P 500 help to increase the level of negativity and scare some of the bulls.

I discussed the other day how the close is what counts, and the close today was the worst we've had in a while. The market sold off hard as fear of holding overnight finally became an issue. While it is painful action if you are holding long positions, we need a shakeup periodically for a healthy market. I was fooled by the power of the V-shaped bounce in February, but as I said in January, I don't expect the market to repeat what it did in 2013 and not suffer any real corrections.

It is a mess out there, but the good news is that opportunities are being created.

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

March 26, 2014 | 1:53 PM EDT

Don't Play the Bottom-Fishing Game

  • When the market is acting this way, just stay out of the way.

The market continues to cover up some extremely poor action under the surface. Many small-caps and speculative favorites are seeing downside momentum building and even recent favorites like Facebook (FB), Tesla (TSLA) and Twitter (TWTR) are breaking down.

The lousy trading in King Digital (KING) isn't helping matters but the bulls are lucky so far that the DJIA is holding up so well and keeping sentiment positive. We actually had an increase in sentiment this past week in the Investors Intelligence poll, despite the Russian issue and the fact that we have not had good momentum leadership for a while.

When the market is acting this way, I simply stay out of the way and don't even try the bottom-fishing game. Typically, the media will urge you to hurry up and buy weakness. That has worked pretty well many times in the last couple of years, but my preference is not to average down but to be patient and join the party late. I see nothing that I'm interested in buying right now.

March 26, 2014 | 10:30 AM EDT

Still Holding Up

  • But we need better strength in the momentum names.

With breadth running about 3,300 gainers to 1,700 decliners there is plenty of green on the screens, but the buying is tepid and there isn't any hurry to reload the momentum stocks that have struggled so much the last few days.

The defensive big-caps like  IBM, Microsoft and Johnson & Johnson are mixed, but they are still helping to hold up the overall market. The small-cap indices are back in the red, which is what concerns me because that reflects a dearth of speculative interest. The market goes higher when traders have a high tolerance for risk and that isn't the case right now.

Speaking of speculative risk, the much-anticipated King Digital (KING) is trading very poorly in the early going and looks a lot like Facebook (FB) did on its first day, even without the technical glitch. The stock was prices at $22.50 and hasn't traded in the green yet. That is not what we need to help improve sentiment.

I'm dinking around with some small trades and continue to hold a very high level of cash. My favorite long right now is Quantum Fuel Systems Technologies (QTWW), which I've discussed previously. It had a couple good Buy recommendations yesterday and is a slow mover, but going in the right direction.

It isn't very inspiring market action, but we are still holding up. That is good enough for now, but if we don't see some better strength in the momentum names soon impatience will grow and selling will increase.

March 26, 2014 | 8:09 AM EST

Conditions Are Dangerous

  • I'm not convinced that this shift in character has played out.

"Character consists of what you do on the third and fourth tries." -- James A. Michener

Is the market undergoing a major shift in character?

We have had some very mixed signals lately and the big question for us to ponder is whether the underlying rotational action is a cause for concern or just a healthy shift that will set the stage for further upside. The bulls argue that the buyers are still out there and are putting money to work, while the bears argue that the shift to defense and out of momentum is a sign that trouble is brewing.

Right now the market is being led by the Dow and big-cap names such as IBM (IBM), Microsoft (MSFT), Wal-Mart (WMT), Caterpillar (CAT), Johnson & Johnson (JNJ) and Cisco (CSCO). While these names are often favorites of big mutual funds they seldom lead the market for very long. Typically aggressive investors look for stocks that have a higher beta which simply means that they tend to move faster. Market players will often favor names like Google (GOOG), Apple (AAPL), Amazon.com (AMZN) or Tesla (TSLA) because when the market is strong they will provide bigger mover than something like MSFT or Hewlett-Packard (HPQ).

Moves in defensive and conservative stocks are often driven by the fact that many fund managers are required to stay heavily invested all the time. They are not allowed to hold high levels of cash, so when they want to be bearish they will park capital in names that are less likely to sink as fast as the big momentum names. MSFT might be a boring stock, but it isn't going to fall as fast as a TSLA is a bad market.

The bullish spin on this action is that the market is undergoing a rotational correction, which is quickly played out and will return the market to health once we wring out some of the speculative excess that has blossomed in groups like biotechnology and China Internet names. Many of these stocks have become overheated as traders have sought out relative performance in high-beta names and now they are correcting.

The bearish spin is that the market is undergoing a change in character and that while the defensive names are covering up, much of the weakness there is major distribution taking place and many key names are breaking support levels.

Given the way this market has acted for the last couple years, it is tough to be too bearish for long. Time and again we have quickly reversed and acted as if nothing had happened just when it looked like we were finally going to see a major correction. If you looked for downside momentum to build, you have been on the wrong side of the market.

What is different this time is that we are seeing a major rotation and aren't seeing the dip buying in key momentum names like we did before. Rather than buy the weakness, money is moving into defensive stocks. That seems to indicate that there is greater concern this time about the ability of the market to regain its footing.

Most of the stocks I tend to favor have struggled recently, which has forced me to raise a very high level of cash. I'm happy to redeploy it as things start to act better, but I'm not convinced that this shift in character has played out. We could easily see more relative strength in defensive names, which is going to keep pressure on growth names.

While the correction in high-momentum names has been quite severe already, the overall indices have barely suffered a blip. It is easy to see why bulls are not feeling very concerned as they focus on the S&P 500 and Dow. I'll keep looking for trades, but overall market conditions are dangerous and the probability that we will see a further change in character in growing.

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