A Sluggish Start

 | Apr 01, 2013 | 4:29 PM EDT  | Comments
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The first day of the new quarter was not very impressive. The market looked tired all day, and there wasn't any buying interest of note. What was worse is that in just a single day, the Russell 2000 (IWM) gives back three weeks of gains. Small-caps have lagged lately and aren't up that much as the S&P 500 hit new highs, but it still goes to show how quickly things can turn when the market starts to struggle.

While it was a pretty dreary day, it was the sort of action that we need every once in a while to reset things and to create some new setups. There weren't any signs of panic selling, but there were some pretty good-sized pullbacks in certain small-caps and things like Apple (AAPL) and Netflix (NFLX).

What we need to watch for now is downside follow-through. The selling today was on lighter volume, and this was not a technical distribution day, but what we need to watch for is the possibility that the dip-buyers are losing interest and that we may start to take out some areas of support.

At this point there still is no reason to be too concerned about the start of a topping process, but the relative weakness among small-caps and the lack of energy is of some concern. Market players may have just been a bit tired after the long weekend, but they need to regroup and go back to work before more decay sets in. It wasn't a good day, but it was not bad enough to be a major concern.

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


April 01, 2013 | 1:59 PM EDT

The Close Is the Key

  • A weak finish today suggests more near-term downside.

The market bounced off the intraday lows but breadth is still running better than 2:1 negative and there are no notable pockets of upside momentum. The selling isn't particularly aggressive and after the recent run, some profit taking is healthy. The action seems to be more a function of disinterest and a lack of buyers than a rush to lock in gains.

The key, of course, will be the close. A weak finish today would suggest that we have more downside to come in the near term as market players play tighter defense and lock in gains. The bulls actually need this sort of action to give us a better foundation for more upside.

It is run-of-the-mill selling so far, but I don't see any reason to rush in and buy here. I'm going to give it a bit more time before I start looking for entries in stocks on my watch lists. In particular, I want to see how the weakness in small-caps plays out in the final hour of trading.

Tighten up stops and don't let recent profits slip away. On the other hand, it is premature to be overly negative. This is weak action is healthy in the bigger scheme of things.


April 01, 2013 | 11:16 AM EDT

Seeing Good Action in Small-Caps

  • The market is doing some low-volume selling, but these lesser-known names are popping.

A weaker-than-expected Institute for Supply Management report is providing an excuse for a little profit-taking to start the new quarter. After the long weekend, the action already had a hung-over feel to it, and since we have little positive news on the wires, we have some low-volume selling.

Small-caps are lagging, and this is reflected in the Nasdaq, which has close to 2 to 1 negative breadth. Biotechnology speculation continues, while oil, steel, commodities and chips are weak.

I made a couple of minor sales but continue to see good action in select small-caps such as Santarus (SNTS), Gray Television (GTN) and Sinclair Broadcast Group (SGBI). I added some NetSol Technologies (NTWK), which I mentioned recently. NetSol is expected to increase earnings 146% this year, and it sells with a trailing P/E of 13. The chart is a good example of how the average volume level tends to rise as a stock is being discovered. Average volume is now running at nearly 500,000 shares, vs. about 100,000 shares back in January.

Overall, I don't see many buying opportunities right now, and I want to make sure I protect gains, so I expect to increase my cash position.


April 1, 2013 | 8:22 AM EDT 

Don't Anticipate Disaster

  • It's a losing game.

As a rule, what is out of sight disturbs men's minds more seriously than what they see. --Julius Caesar

As we kick off the second quarter of 2013, the big question is whether them market can continue to run up as steadily and consistently as it did in the first quarter. It was an exceptional and strong performance, but what was most notable was that relatively few market players fully embraced the positives. I can't recall when a market so strong has had so little celebration outside of the media.

Ever since the market bottomed in March 2009 there has been a large group of market players waiting for the second shoe to drop. We never had a retest of the lows and the corrections that did occur were fairly brief and shallow. The bears keep anticipating the long-awaited disaster that never seems to come. They attribute the stubborn strength to the Fed and its printing press and point to the disconnect between the overall economy and the strength in the stock market as proof that the market is simply being manipulated by the artificial creation of liquidity.

This weekend I spoke to a couple of casual market observers and I was surprised by how little faith they have in the market. They were confident that a major pullback will occur soon and cited a long list of reasons to support their thinking. While this was anecdotal, I believe these are very widely held views and have helped to create a perpetual wall of worry that the market continues to climb. The main reason the market trended so strongly is because there have been so many doubters who keep inching in out of frustration rather than conviction.

The advice I've been giving for some time continues to be valid: Don't anticipate disaster. The easiest thing in the world to do is find reasons why this market will not continue to trend higher. Virtually everyone has a good argument for how things are going to go wrong down the road as the politicians continue to spend money like drunken sailors and the slow economy prevents real revenue growth.

Anticipating negatives is a losing game. The time to become negative is when there is price weakness. Until that occurs, the way to make money is to stay with the trend. It may be entertaining to read the opinions of pundits who think real weakness is just around the corner, but they have been saying that for months if not years and have been wrong.

It is all about accurate timing and you are more likely to time things well if you react rather than anticipate. Keep in mind that markets at their highs don't just suddenly fall apart and go straight down. Tops are a process that play out for a while and there is no sign yet that we have begun to top.

We have potential negative catalysts coming such as seasonality and earnings season, but the key word here is "potential." Wait for the weakness to actually occur before becoming negative.

It's a very slow start following the long weekend and not much news flow to drive things. Overall, the tone remains positive.

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