Speculators Cool Down

 | Apr 02, 2013 | 4:13 PM EDT
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The market action underwent a change in character today, with small-cap speculative stocks being hit while a few big-cap names kept the senior indices in the green. We had started the day with strength across the board, but the small-caps lagged badly, and by the end of the day breadth was solidly negative, even though the DJIA still had a good-sized gain.

During the first quarter of the year, small-caps often outperformed while the Nasdaq-100 lagged. That reversed today, and you have to wonder if that is a sign that speculative interest is slowing and that money is now rotating into "safer" big names. If so, the concern is that market players are becoming more cautious, and that would put a cap on further upside.

In my trading it is the action in individual stocks rather than the indices that determines the way I'm positioned. With all the reversals in small-caps yesterday and today, I end up cutting my exposure quite a bit and raised quite a bit of cash. The indices still look pretty good technically, but the individual stock charts are problematic, and ultimately that is what I am buying.

As I've noted quite often lately, it has been a mistake to be too negative too quickly. This market seems to regroup very quickly after some weak action, but this was different today, with the big disconnect between the Dow and small-caps. The fact that speculative interest in the riskier small stocks is shifting is a concern, and I'm going to be more cautious as a result.

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

April 02, 2013 | 12:58 PM EDT

No Rewards for Volatility Traders

  • The market has mostly moved in one direction -- up.

According to CNBC, the average hedge fund substantially underperformed the major indices with a gain of just 3.3% in the first quarter of the year.  Given all the complaining we've heard about the market, it isn't that big of a surprise but the big question is why.

I suspect that the primary reason for underperformance is that the market mostly moved in just one direction. Hedge funds gain their advantage by zigging and sagging, taking advantage of volatility. This market has essentially had no volatility. It gapped up on the first day of the year and only had one dip of any size and that only lasted a couple of days.

The best approach to this market was to buy that gap up open on Jan. 2 and not do a thing. If you tried to sell strength and buy dips, you never had the opportunity to buy. If you hedged at all, you cut into your returns.

Anything other than buy and hold during the first quarter likely produced underperformance. That is the reason so many active market players have hated this action. It just does not reward the folks who like to trade volatility.

The first quarter of 2012 was very similar but volatility increased sharply in the second quarter as seasonality kicked in and the macro issues in Europe started having more impact. I suspect that may occur again, but I'm not making any bets.

I've been a net seller today not because I'm bearish but because I'm not finding enough new buys. I added to a position in Clearsign Combustion (CLIR), which was a Shark Technical Buy yesterday, but mostly I've been cutting positions. Small-caps are lagging and that has me a little concerned. If the market continues to run, I'm going to miss out, but it looks like there already are a large number of hedge funds in the same boat.

April 02, 2013 | 10:26 AM EDT

Digging for New Ideas

  • But I'm not expecting to put much new money to work right now.

This market continues to do a remarkably good job of trapping those who are too negative too fast. After a dismal Monday, the market gapped up on good breadth and suddenly there is great anxiety to find long exposure.

The big challenge for the bulls is that so many stocks are extended on light volume and it is very tough to chase, especially if you aren't in already. This market simply refuses to allow for much consolidation, which means you have to be willing to buy strength because you just don't get many dips.

I did a little flipping into strength this morning of Himax (HIMX), Radian (RDN) and NetSol (NTWK) but my long inventory is very limited, so I'm digging for new ideas. The broadcasting sector has been very strong which is why I made Nexstar (NXST) my Stock of the Week. Another in that group that I like is Entravision (EVC) and I started a position there.

I'm going to keep looking for new buys but I'm not expecting to put much new money to work right now.

April 02, 2013 | 8:15 AM EDT

Don't Turn Bearish Just Yet

  • The big mistake has been overthinking the market instead of sticking with the trend.

There's an idea that hell is other people. My idea is that it might be repetition. --Stephen King

Monday was one of those days where the indices helped to hide soft action under the surface. Small-caps in particular were weak but the DJIA remained steady and covered up a bout of profit-taking.

After the run in the first quarter, profit-taking shouldn't be surprising; it is healthy. The market periodically needs stocks to rotate into new hands as short-termers lock in gains and stand aside. It is a healthy process that helps to establish good support for further upside.

The lesson of this market for quite some time is not to become too bearish too quickly. There is a natural inclination to anticipate further weakness after a day like yesterday, but this market has had a strong tendency toward immediately shaking off any worries or doubts. Just when the bears begin to feel they may finally see their long-anticipated negative action, the market bounces right back as if nothing has occurred.

Ironically, these quick recoveries, after just a day or two of weakness, squeeze bears and catch underinvested bulls by surprise, which adds to the upside pressure on a bounce. Many of market players anticipate downside, which helps to support a wall of worry for this market to continue to climb.

While I don't see any reason to be overly negative yet, it is not easy to keep money at work. Yesterday shook me out of a number of positions that pulled back and I saw few places where I could put idle capital to work. The market uptrend is intact but the buy points are quite challenging. It seems like I complain about that far too often but it is one of the conditions of this market that has persisted for a long time and helps to maintain the positive upside action.

The best advice I can give remains the same: Don't be too quick to be bearish and don't anticipate market disaster. The market has continually comeback quickly from any softness and, despite all the doom and gloom from pundits, the market keeps chugging along. The big mistake has been overthinking this market action rather than sticking with the trend.

If you are worried about the market and think that a top is about to form, the way to handle it isn't to rush to sell and load up on shorts. What you should do is set tight stops and only sell positions that falter. If they are still acting OK, stay with them and maybe reduce their sizes a bit.

One of the odd things about this market rally is that so many bulls seem to be chronically underinvested. They always seem to be struggling to put money to work, which is one of the big reasons it keeps on running. It is understandable that there is a hesitancy to embrace this market, but it is those doubts that keep it running.

A decent bounce is developing this morning. After the weakness yesterday, it will be interesting to see if there is selling into strength, but I have no interest trying to short this action. The bears need more than a day or two of low-volume selling to convince me that a top is beginning to form.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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