Stuck in a Middle Zone

 | Apr 04, 2013 | 4:05 PM EDT
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After the ugly action Wednesday, the market did little to clarify things with today's dull action. The bears will point out that the bounce buyers didn't have much vigor and didn't produce the usual quick recovery. The bulls will point out that there was no downside follow-through and that there was decent underlying support.

Typically, the bulls have done a better job coming back from the sort of selling we had Wednesday. It feels a bit different this time and I'm not feeling as confident about another V-shaped move back up. Of course, every time you doubt the ability to bounce back, it happens again, so it is tough to rule out.

The monthly jobs report in the morning will serve as a catalyst for whichever way the market does move. Economic reports have been generally weak lately so the bears are looking for a downside surprise. On the other hand, expectations have dropped after the ADP report and weekly claims, so a small miss may not matter very much.

So far, the market isn't offering much opportunity. It hasn't pulled back enough to give us interesting entries, but it isn't bouncing enough to make chasing worthwhile. We are in a middle zone where it is quite easy to make impatient trades that don't do much.

We'll see if the jobs news shakes things up. Have a good evening I'll see you tomorrow.

Apr 04, 2013 | 1:44 PM EDT

Downright Dreary Action

  • But no cause for alarm yet.

The dip-buyers are struggling to keep the morning bounce going and have allowed the S&P 500 to drop back into negative territory. I keep writing about how this market has consistently bounced right back after a day like yesterday, so it is a change of character when we actually have some continuation to the downside. Pressing shorts simply has not been effective but the action today favors the bears.

One thing I keep hearing from the bears is that the market has weakened every spring for the last three years. We have a good first quarter but the old adage about selling in May seems to kick in. It isn't May yet, but the pattern of a rollover at some point after the first quarter looks daunting.

I've done no buying today; there isn't anything down enough to tempt me to bottom fish or strong enough to make me want to chase when the overall market is showing so little life. I'm not worried about it as this market could use some consolidation and rest, but I do worry that we'll see volume drop too much. We still don't have individual traders back in this market to any great extent, and it won't help if we have a slow drip over a longer period.

It is downright dreary but it this is only the second day of weakness nothing to be too concerned about.

April 04, 2013 | 10:42 AM EDT

Itching for More Action

  • The oversold bounce this morning doesn't look very convincing.

For quite some time the pattern of the market following a weak day like yesterday has been a weak bounce that doesn't look very convincing, but then it slowly gains momentum and refuses to fade. Before you know it, we have another V-shaped recovery and the ugly action that just occurred is completely forgotten.

The oversold bounce this morning sure doesn't look very convincing, but it is holding and you can already sense a little anxiety among bears and underinvested bulls. This is action typically would be faded in a "normal" market, but it seems to stay stubbornly strong in the current environment.

I'm itching to be more active but have very little on my radar. The best-looking action I see is in Sarepta (SRPT), which had a very positive recommendation, but the vast majority of small-caps that I follow aren't very lively. I'm going to stay patient and see if the bears can mount an attack like they used to, but I don't even think the bears have much confidence in their ability to put together two poor days in a row.

April 04, 2013 | 8:21 AM EDT

One-Way Action Is Troublesome

  • As an active trader I find it to be a major obstacle.

I didn't want normal until I didn't have it anymore. -- Maggie Stiefvater

Although the action we had on Wednesday can be quite painful if you are heavily long, I still find it refreshing to have some normal volatility again. Since the market low in March 2009, the nature of volatility has changed dramatically in this market.  Many attribute that to the flood of liquidity created by the Fed that provides a perpetually underlying bid, but there is no question that the market does not tend to move to the downside like it used to.

Stocktwit notes this morning that "(s)ince 1990 the $SPX has had a daily decline of 1% or more 32 times in an average year. Today's was the 4th of 2013." I'm not able to confirm that statistic, but it goes to show how few real pullbacks we have in the market.

I'm sure there are many market players who are thrilled about this one-way action, but as an active trader I find it to be a major obstacle. Where traders tend to outperform the most is during market pullbacks. It is the ability to time those 30 or so days when we sink 1% or more that produce substantial outperformance. If we are never going to have any real pullbacks then you might as well just buy a highly-leveraged index ETF and head for the beach.

Rather than complain about the lack of real volatility in this market what we need to think about is whether the selling yesterday was just another one of those little blips that will be quickly and completely forgotten. The prior days in 2013 on which the SPX sunk 1% were all totally reversed in a matter of days. If you started planning on a downtrend of some duration you have been very painfully squeezed.

In other words, it has been a big mistake to anticipate downside momentum to build after one poor day. There has been no downside continuation at all since November 2012.

Of course, the bears will tell us that this time is different. Seasonality has shifted and we have a pattern of weakness in the spring for a number of years now, especially when we have a strong first quarter. In addition, recent economic data have been soft and there are some nagging fears that the Fed may not continue to run its printing press forever.

The most important thing to keep in mind that anticipating downside action has caused more losses than anything for the last four months. We are already seeing a big bounce this morning and you can almost hear the bears groaning, "here we go again."

As small-caps struggled this week I sold positions and raised a substantial amount of cash. I'd like to see the correction expand further in order to create some better entry points, but what the market always seems to do is to immediately bounce and force all the underinvested bulls like me to scramble to try to find some new long exposure. It has created constant chasing and is a big part of the reason the market seems to only move in one direction.

I have a few things on my watch list that I would like to buy, but they need further time to set up. We'll see what happens with this opening bounce and if it looks like we have another V-shaped recovery I'll try to find some new positions.

No serious traders ever said it was easy.

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