A Well-Deserved Bounce

 | Mar 31, 2014 | 4:08 PM EDT
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The market was due for a bounce and delivered a pretty good one today, but many traders shrugged and seemed unconvinced. It even managed a good finish this time, but the action was largely dismissed because it's the last day of quarter and ripe for window dressing.

Volume was unimpressive but the most troubling aspect of the action today was that momentum and high-beta stocks continued to underperform. Stocks like Netflix (NFLX), Tesla (TSLA), Facebook (FB) and Google (GOOG) saw very little interest while stodgy big caps like Oracle (ORCL), Microsoft (MSFT) and Alcoa (AA) pushed the indices up.

So many V-shaped bounces have begun in a lackluster fashion, which makes it hard to declare that this action is just a dead-cat bounce. Many traders believe the action tomorrow will give us a much better clue as to the health of the market. The first day of the new quarter should attract new money, and fund managers are always anxious to start strong, so it will be a good test to see how aggressive the buying is.

Based on the S&P 500 and DJIA, you would have no idea that this market has suffered at all recently, but a review of stocks in the Investor's Business Daily 50 tells a different story. Rotation into new leadership can be quite healthy but not when it's low beta "safety" stocks that are leading the market.

We'll see if the bulls have another "V" in their bag of tricks, but nothing in the action today suggests that they can deliver another amazing straight-up recovery. I've been wrong about this before and will be happy to revise my position, but this market feels quite different this time because of the shift in leadership.

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

March 31, 2014 | 1:20 PM EDT

Playing Into Strength

  • It's positive action, but few opportunities to put cash to work.

Could this action be the start of another V-shaped bounce? The S&P 500 and DJIA are barely off their all-time highs, but the Nasdaq and Russell 2000 have been hit hard and they are finally seeing a good bounce for the first time in seven sessions. Is the correction over? Is it smooth sailing to the upside as we kick off a new quarter and await the start of earnings season?

Betting on a quick and easy recovery has worked out quite well for over a year, but is it different this time? The big difference on my screens is the severe rotation out of high-momentum stocks and into lower-beta and defensive names like Jonson & Johnson (JNJ), Microsoft (MSFT) and Alcoa (AA).

Typically, strong markets are not led by low-beta or defensive stocks. When the market is strong, money flows into the stocks that will move the fastest, which is why momentum stocks are always leaders. When they lag, it is a sign that sentiment is shifting and that the market may be undergoing a change in character.

As I mentioned last week, I was looking for an end-of-quarter bounce to commence Friday, but the action fizzled late in the day. Today is more of what I was expecting, but I will be very surprised if it turns into yet another V-shaped bounce. The market tends to have a positive bias on the first day of a new quarter as new money is put to work, but we will start looking ahead to earnings season fairly soon and that is going to add choppiness.

I'm using the strength today to book gains and exit some positions. While it certainly is positive action, I don't see many opportunities to put much cash to work.

March 31, 2014 | 10:33 AM EDT

A 'Mark-Up' Bounce

  • I see little reason to trust it to last.

The fact that it is the end of the quarter is probably giving extra juice to the Monday morning gap. Biotechnology, which has been the primary victim of momentum selling recently, is leading to the upside. We have good breadth at about 4-to-1 positive, and most major groups are in the green. Precious metals continue to struggle and oil is seeing profit-taking. Many momentum names are bouncing, but there doesn't seem to be much conviction. Tesla (TSLA), in particular, is having a hard time finding traction

I suspect many money managers are trying hard to tack on relative performance today and aren't particularly interested in building anything longer term. The indices are around flat, so some small gains are all that are needed to outperform. Last year, it was extremely difficult for many funds to keep pace with benchmark indices, so many are probably happy to see flatter action.

I've done some flipping this morning and have a number of smaller positions Senomyx (SNMX), Kongzhong (KONG), Arotech (ARTX), Sky-mobi (MOBI), Fonar (FONR), Novadaq Technologies (NVDQ), BioTelemetry (BEAT), Flamel Technologies (FLML), Kandi Technologies (KNDI) and Quantum Fuel Systems Technologies Worldwide (QTWW). I am managing them as best I can and I'm not inclined to build anything big right now. This looks like a routine oversold, "mark-up" bounce and I see little reason to trust it to last.

March 31, 2014 | 8:34 AM EDT

A Sorely Needed Debate on HFT

  • These discussions are hitting just as the market undergoes a shift.

"The United States stock market, the most iconic market in global capitalism, is rigged ... by a combination of the stock exchanges, the big Wall Street banks and high-frequency traders." --Michael Lewis, author of Flash Boys, on 60 Minutes

After a difficult week, in which money rotated out of high-momentum and speculative stocks and into low-beta and defensive names, the big question is whether the market will finally undergo a major change in character.

Over the past five years, two major factors have been driving the market action. First has been the endless flood of cheap money produced by the Federal Reserve, and the second has been high-frequency or "flash" trading. Both of those factors are facing intense scrutiny just as the price action in many stocks has been shifting.

The Fed seems determined to taper off its bond-buying and eventually raise interest rates, and this is probably the most obvious piece of fundamental news impacting the market right now. The mantra, "don't fight the Fed," has worked extremely well for years -- and we are now forced to start contemplating how that will change as quantitative easing is slowly withdrawn.

So far the reaction to the shift has been relatively mild. This has disappointed the bears, who had been convinced that the advent of tapering would crush the market. But a slow shift in psychology and sentiment is nonetheless taking hold: The bulls know that the Fed will no longer bail them out, and that they need catalysts from somewhere else. That is not going to be easy, and those bulls have already decided that maybe it would be better to dump some of the high-beta momentum names and move into something more conservative.

Michael Lewis' attack on high-frequency trading (HFT) -- see the above quote from Sunday's 60 Minutes interview -- also holds the potential for producing a major change in market character. Anyone who has been active in the market the last few years is painfully aware of how HFT has corrupted the action. The exchanges have condoned it, as they've benefited from the increase in volume, and many traders have welcomed it as well, since it has helped create endless upside action. However, the trading has been robbed of human emotion and hasn't felt "normal" in very long time. HFT has driven away individual investors and undermined confidence in the markets.

The issue with HFT isn't just in how it uses superfast networks to extract billions of dollars from the market a penny at a time -- the main thrust of the 60 Minutes Michael Lewis piece. The main problem is that it changes the way that stocks trade. The programs are so intent on front-running the order flow that they totally corrupt the normal ebb and flow of the price action. It is why we're seeing so many "V"-shaped moves and so much straight-up action. The computers want to extract their pennies, and the best way to do it is to create artificial demand and keep moving stocks upward.

Several other aspects of HFT went unaddressed, as well -- such as how such traders obtain news flow and price information ahead of the average investor. Even though a human can't act as quickly as these HFT computers do, it all feeds into the perception of an uneven trading field. It gives the action an artificial and random feel -- and, again, that scares off individual investors who already feel they are at a disadvantage, causing them to feel they simply can't compete.

In short, nothing has been worse for the market than the corruption it has suffered due to the HFT computers.

Hopefully the press around the new Michael Lewis book will have an impact on the HFT debate. The market will never again be the way it once was, though some easy fixes do exist that could level the playing field. In the meantime, these current discussions are hitting just as the market is starting to undergo a shift -- and perhaps that will finally work to end the "V"-shaped action. Many bulls won't be happy about that, but a more normal market will have ups and downs. That isn't a bad thing.

We're seeing a small bounce in the early going, but it is looking to be a choppy and interesting week.

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