Change Creates Opportunity

 | Mar 27, 2014 | 4:17 PM EDT  | Comments
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Stock quotes in this article:

jnj

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cat

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hpq

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king

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goog

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qtww

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mdwd

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rlyp

After the pounding the last four days, many momentum names were oversold and looked ready for a bounce. But the dip-buyers were gun-shy and did little. A few names in the social media sector, including Facebook (FB), YELP (YELP) and Twitter (TWTR), managed to go green after a gap down, but there wasn't much life in the great bulk of stocks.

Breadth was negative and, once again, the DJIA and S&P 500 helped to cover up the poor action in the Nasdaq and Russell 2000. Back in February, the dip-buyers couldn't wait to buy the momentum names on pullbacks like we've had recently, but this time they seem to be wondering if they should focus on other groups like financials or oils.

If we are going to see a bounce, it should kick in tomorrow with the help of some end-of-the-quarter window dressing. Tomorrow is the peak day for the funds to try to mark up their main holdings, and traders are always anxious to make such action self-fulfilling. You don't have to believe that window dressing actually occurs if there are enough traders who do.

While the action was lackluster today, I'm still pleased to see the market undergo a shift in the way it is acting. Change is what creates opportunity. We just need to start looking for ways to take advantage of it as it develops.

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


Mar 27, 2014 | 1:39 PM EDT

A Different Feel

  • The market is more cautious after rotating into safety stocks and old tech.

After momentum stocks and speculative small-caps have been pounded for four days, we have some mild bounce action, but we definitely aren't seeing the dip-buyers who were so anxious to jump in back in February. The market has had a different feel ever since this rotation into safety and old technology started, and it is continuing today.

Back in January, I wrote a number of articles about how 2014 wasn't unlikely to be similar to 2013. Of course we then had one of the biggest, straight up V-shaped moves in a long time. It was exactly the same sort of one-sided action that we had consistently the last couple years.

I'm going to go out on a limb again and predict that we are unlikely to see the same sort of V-shaped move once again. We will have some pretty sizable countertrend bounces, but the recent rotation is an indication that market players are changing their approach, and rather than constantly chase high momentum names, they are shifting to more conservative ways to put money to work.

Of course, I'm not going to be dogmatic with my view and will adapt if the bulls can run like that again. But since the Fed is tapering, one of the major drivers of the V-shaped moves is no longer going to have as much impact.

I have to admit that my prediction isn't purely objective. I would love to see a return to "normal" action in which we have ups and downs and you could actually time the market and trade stocks aggressively without fear of being left out if you didn't just keep on buying. The best markets are those that offer volatility and punish perma-bulls who think that things can never go down. Constantly buying relative strength is a great strategy, but I'm ready for something a bit more creative.

I'm still looking for the market to deliver a bit more upside as we close out the quarter. Facebook (FB) has already produced a good bounce, and now I'm looking for other big-caps to join in. Google (GOOG) remains my favorite window-dressing play right now.


March 27, 2014 | 10:46 AM EDT

Buying on the Dip

  • I added a big-cap favorite on the soft open.

Many dip-buyers have been waiting for a soft open before jumping in and they finally had one this morning. The last four days the market has opened up and reversed, and what we needed for better buying was early selling instead.

One additional positive the dip-buyers have right now is that the quarter is ending and there is likely to be window-dressing pressure. That is one reason I bought Google (GOOG) on the soft open this morning. GOOG isn't a stock I trade very often, but it is a big-cap favorite with a good valuation and should be one that institutions want to mark up into the end of the quarter.

In addition to GOOG, plenty of other stocks with broken charts are seeing decent bounces this morning. I added to my position in Quantum Fuel Systems Technologies Worldwide (QTWW) and I'm eyeing broken biotechs like MediWound (MDWD) and Relypsa (RLYP), which are thinly traded.

I'm not convinced we have seen the lows in the indices, but we are set up for a good countertrend bounce. Just make sure you adjust holding periods and don't let bad trades turn into long0term investments.


March 27, 2014 | 8:43 AM EDT

Not Afraid of Change

  • I am excited about the possibility of new market opportunities.

"It is not the strongest or the most intelligent who will survive but those who can best manage change." --Charles Darwin

On Wednesday, the weakness that has been plaguing the market for the past week was finally reflected to a small degree in the Dow Jones Industrial Average and S&P 500. The two senior indices are still only a smidgen off their recent highs, but they did see an increase in selling pressure yesterday as the carnage in momentum stocks, small-caps and speculative names continued.

The selling under the surface has been so intense that Investor's Business Daily has moved its market rating to "market in correction." Last year, that would often mark a bottom and start the process of a V-shaped bounce back to new highs. But this recent market action is quite different than the pullbacks we have seen the last few years.

The main difference is that it has been a rotational correction. We aren't just seeing some selling of extended and overheated names. Money has been moving out of the growth names, that have led for so long, and into conservative blue chips, including Johnson & Johnson (JNJ), Caterpillar (CAT) and Hewlett-Packard (HPQ). Even the IPOs, which have been immune, suffered an ugly blow on the failure of the King Digital Entertainment (KING) offering to even come close to holding its pricing.

The selling in momentum names has probably been severe enough now to set the market up for some sort of bounce attempt. But the much more important question is whether we are finally seeing a market that is undergoing a change in character. The pattern of action in this market has been extremely consistent for quite a while as the market immediately recovers just when it seems to be on the brink of falling apart. The money comes pouring in, and not only does the market bounce but it also goes straight back up.

Some folks blamed the selling pressure yesterday on comments by President Obama about the Russian situation. That may have been excuse for some selling but the more likely cause is related to the one thing that has driven this market more than any other:  the Fed.

The market shook off its immediate concerns about Fed Chair Janet Yellen's comments at her press conference, but the idea that quantitative easing is going to be wound down and rates will rise is taking hold. There is nothing more important to the market than that and it is clear that a change is gradually taking place. That is what is producing a change in market character. Other issues including Russia, economic data and bank stress tests may have an impact, but the old saying about not fighting the Fed is the core of what is bothering the market.

While the change in the way momentum and speculative stocks have been acting is painful in the short term, I am excited about the possibility of new opportunities arising. I have missed the opportunity to actually time the market and trade ups and downs for a long time. What has worked was simply buying relative strength and holding on as more money piled in. It was great for pure trend following but was difficult for active traders who like to move in and out.

We'll see how things develop from here, but the nature of the market has undergone a change over the past week. We'll have to watch to see if it is just another temporary glitch or the beginning of a real change in market character.

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