An Automatic Response

 | Apr 02, 2014 | 4:30 PM EDT
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Buyers were indecisive most of the day and rotated out of momentum stocks for a while, but buy programs kicked in and fear of being left behind took hold again.

As is often the case, the bears are never able to press much when they have a slight advantage. They are unable to take things down, which is all the buyers need to pile in again. With the Nasdaq straight up for four straight days, it sure looks like our old friend the V-shaped move. The softness in the momentum names early in the day was misleading, but trying to fade an oversold bounce caused great pain for the bears again.

While we always have to respect the price action, it did feel very program-driven this afternoon as many momentum names turned in tandem and went from red to green. Google (GOOG), for example, was down most of the day after it failed to hold the opening gap up. It bounced back into the close along with many of the other high-beta names. I suspect the HFTs gave an assist to the computers to help produce this late surge.

The most impressive thing about the market is how worried many traders seem to be that the market is going to run away from them again. It has happened so often that buying has become an automatic response as soon as there is even limited buying pressure, and that is why we see the "V" so often. Endlessly chasing strength may seem brainless, but it works.

We'll see how far the bulls can push it this time, but I'm not betting against them.

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

April 02, 2014 | 1:52 AM EDT

A Rare Beast

  • Don't rule out a failed bounce with this change in market behavior.

On Tuesday, momentum stocks finally managed a decent bounce. Typically, that has trigged sustained buying and a run right back up, but we are not seeing very good follow-through so far. The rotation that plagued many traders seems to be continuing as the hot money looks to exit high-beta big-caps and speculative small-caps into the minor strength.

This is a change in market behavior and brings to the fore the possibility of a failed bounce. That has been a rare beast in this market, but we'll have to watch closely to see if support levels hold. For example, the 50-day simple moving average of the Nasdaq around 4223 will be important, as is 1870 of the S&P 500.

I'm unimpressed by the action on my screens, and I will be selling more if we don't see better energy into the close. We may actually be seeing more normal action as the positive impact of the start of a new quarter wears off and the market starts to anticipate earnings season.

April 02, 2014 | 10:48 AM EDT

Looking for Follow-Through

  • So far, the momentum players aren't finding any.

The momentum traders looking for follow-through to Tuesday's bounce are having limited luck. While a few things like Intuitive Surgical (ISRG), Tesla (TSLA) and Baidu (BIDU) are up, the majority of stocks on my momentum screen are in negative territory, most notably Google (GOOG), Chipotle (CMG) and Netflix (NFLX).

Breadth is running very close to even, with precious metals leading for the first time in a while. Biotechnology also is bouncing a bit but the action is very mixed overall. Most of the small-cap speculative names on my screens aren't doing much.

I don't see much of interest, but one theme that keeps popping up is electric cars and batteries. The pollution problem in China plays well into that. Some studies show that inhaling the air in Beijing is the equivalent of smoking 21 cigarettes a day and the government there is aware of the problem. Bloomberg has an article this morning that China is exempting electric-car buyers from sales tax, and other incentives may be used as well. That news is boosting stocks like Kandi Technologies (KNDI) and Highpower International (HPJ). Also, names like Plug Power (PLUG), FuelCell (FCEL) and Ballard Power (BLDP) attract sympathy interest. My favorite stock in the alternative energy sector is Quantum Fuel Systems Technologies Worldwide (QTWW) and I will look to add to my position over $10.

The S&P 500 is hitting the highs of the day as I write, and breadth has improved slightly but I'm not finding much of interest, which means I have to keep on digging.

April 02, 2014 | 8:39 AM EDT

Sniffing Out Bullish Signals

  • Does this bounce mark the resumption of the uptrend?

"It's hard to beat a person who never gives up." --Babe Ruth

Momentum stocks enjoyed their best day in nearly a month Tuesday, and it was enough to make some market players downright giddy. The market has undergone a painful rotation recently, with former favorites such as Tesla (TSLA) and Google (GOOG) getting dumped in favor of such names as Microsoft (MSFT) and Hewlett-Packard (HPQ).

If you just looked at the S&P 500 and Dow, you wouldn't notice that anything much has changed of late -- but the high-momentum stocks and speculative favorites have indeed been pounded. Many, in fact, have lost 20% or more in recent weeks.

The big question now is if this bounce -- which is the kind that has repeatedly led the market for most of the last couple years -- signals a resumption in the uptrend. Alternatively, could we finally see one of those failed bounces that grizzled traders remember from many years ago?

After the Tuesday's action, Investor's Business Daily has moved its market rating back to "uptrend," but the problem is that the publication made that change simply because the S&P 500 hit a new closing high. We have not seen any technical follow-through, nor have we seen accumulation days that you would normally look for in determining whether a trend reversal has transpired.

At this juncture, the smart move has typically been to embrace the bounce and not to worry about a failure. Once the market starts to run a little, fear of being left behind kicks in, and that produces a torrent of cash to chase things straight up. With the help of our high-frequency-trading (HFT) buddies, stocks will barely register a downtick and you will be forced to chase if you want to get in.

The market is exactly at the point where HFT tends to have a major impact. As big funds try to put cash to work, the HFTers start pushing stocks upward as they attempt to extract their pennies. Funds that want to immediately put money to work have no choice but to keep paying up -- and this causes the "V"-shaped move. The lack of any back-and-forth price action is the tip-off that HFT is hard at work.

We've seen this sort of action hundreds of times in the last five years, and at this point traders feel it is futile to fight it. If you want to make money, you have no choice but to embrace the "V" and to start chasing. You can't be aggressively long if you wait for pullbacks.

This time the conditions are a bit different because of the major recent rotation. Many momentum stocks are technically broken at this point, and these would normally attract short sellers who would look to sell lower-volume bounces back into overhead resistance -- a strategy that has worked very well for a long time.

There isn't much news this morning, but earnings season is fast-approaching, and that will be the major focus quite soon. The good news here is that it puts the focus back on individual stock-picking. There are always some standouts during earnings season, and that is what makes for good trading.

It should be an interesting day as the momentum traders try to get back on track and keep the bounce going. They have done a good job of it many times, but conditions have shifted a bit lately and this might not be quite as easy to do now as it had been a month ago.

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