Don't Underestimate These Bulls

 | Apr 16, 2013 | 4:30 PM EDT
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After the selling pressure Monday, it isn't surprising that the market bounced back a bit today. It didn't manage to recoup all the losses, but it wasn't a bad recovery for most sectors of the market. There was even a little extra push to the upside at the close.

But not everything was rosy. Precious metals, which led the market down, bounced very poorly and Market Vectors Gold Miners ETF (GDX) couldn't even close positive. There were many bounces, but there was some hesitancy. You have to wonder if the bulls really can pull off another of those V-shaped bounces.

The market has had a very strong tendency to recovery from these selloffs as if nothing had happened. You could almost sense that vibe again today as the action ramped up in the final hours of trading. There is little fear of being caught in a failed bounce.

We are now entering prime earnings season, which will make a further bounce attempt quite interesting. Intel (INTC) and Yahoo! (YHOO) posted numbers after the close and both are trading flattish after an earnings beat. The tone of these reports is going to determine the market action from here, but you can bet the bulls are going to be working hard on the V-shaped bounce again.

Just when you think they can't possibly do it again, they managed to power us straight back up. One of these days, it won't happen -- but it has been a good bet for the bulls for a long time.

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

April 16, 2013 | 1:15 AM EDT

Buyers Inch Back In

  • Afraid to miss out if they don't catch this bounce.

The bulls are working hard on the V-shaped bounce yet again. The early going was a bit shaky but the market held the lows and now more buyers are inching in as worry grows that they might miss out if they don't catch this bounce.

The phenomena of the market going straight back up after being clubbed like it was yesterday has been one of the most surprising themes since the March 2009 low. If you have tried to fade oversold bounces, you have consistently been on the wrong side of the market.

To some extent the V-shaped bounces are probably a self-fulfilling prophecy, but they are also driven by a high level of liquidity that never seems to dry up. Market players seem to forget immediately whatever the factors were that caused the selling in the first place. Once it starts to run up, the fundamental issues are forgotten and the focus on putting as much capital to work as possible.

I have not put much money back to work today but I'll be watching for entries into the close. The way the market is acting, I suspect it will hold up the rest of the day. Instead of trapped bulls looking for exits, underinvested bulls are looking for entries.

April 16, 2013 | 10:28 AM EDT

No Trust in This Market

  • It has made fools of those who were too bearish, too quickly.

A routine, oversold bounce started the day but buyers are obviously timid and momentum isn't building. That's expected after yesterday's rout, but the pattern of this market has been for anemic bounces to hold and gain strength. The longer they hold, the more inclined buyers are to inch in so they aren't left behind again.

Despite this tendency toward bounces that gain strength and keep running, I'm maintaining my trading discipline and not rushing to do any major chasing. One of these days, we are going to see a failed oversold bounce and that is when the real danger will develop.

I used the early strength to unload a few things I regretted holding on to yesterday, but I did add to a position in Himax (HIMX), which is a good example of how a stock with strong relative strength in a poor market will run when conditions improve. HIMX held up very well yesterday and finished down just a penny. That is an indication that there is strong underlying buying interest that helped to drive it up nicely this morning when the overall market improved.

I'm definitely not putting much trust in this market, but I am very aware of how often it has made fools of those who were too bearish too quickly.

April 16, 2013 | 7:48 AM EDT

A Major Shift in Mood

  • Liquidity will not justify blind buying.

Self-preservation is the first law of nature. -- Samuel Butler

One of the most remarkable tendencies of this market over the past few years is how well it can recover from very ugly action.

Typically we have an oversold bounce, but instead of rolling over again as trapped bulls look for an escape, we just keep on running. Before you know it we have another one of those remarkable V-shaped bounces and everyone is wondering why we even sold off in the first place.

Is this just another one of those temporary soft spots, which will be quickly forgotten, or is this a significant change in the market action that is signaling more downside to come?

Given the magnitude of the selling, there is little choice but for disciplined traders to take precautionary steps. Where there is selling like we had on Monday you have to make sure you protect yourself in case we see downside momentum build. It is far more important that we protect capital than anything else, so you need to take stops and raise capital just in case.

What has made this market so tricky so often is how we tend to recover from these setbacks as if nothing happened. The normal behavior is that we have an oversold bounce, but that stuck bulls and aggressive shorts use the strength to sell. That doesn't seem to happen in this market and once we start to bounce we just keep on running.

One of the things that is very different this time is that the selloff was led by the collapse of precious metals, oil and commodities. These have been sectors that have benefited greatly from quantitative easing and the flood of capital created by central bankers. If these groups can sell off even though there is no sign that there is sudden contraction of liquidity it is hard for it to not impact the broader market.

For quite a while the market did a very nice job of shrugging off weak economic reports. The poor jobs news in particular was totally disregarded, although there was wide agreement that it was quite worrisome. The reason given by most commentators for why we were so quick to shrug it off was the liquidity created as the yen was pushed down in Japan. The bulls were happy to embrace that idea last week, but now there is a major shift in mood and liquidity will not justify blind buying.

One of the biggest challenges of this market is that news that doesn't matter at all one day will suddenly become the focus on another day as the price action shifts.  There is no easy way to know if and when a news report will matter. The only way to deal with that is to focus on the price action.  When the price action shifts we have to assume that the way the market is viewing news has also shifted.

The biggest positive the bulls have going for them right now is that first-quarter earnings are rolling out and that is going to shift the focus. We should have some good individual reports and hopefully that will benefit stock pickers.

The bottom line right now is that the action shifted dramatically yesterday and we need to be more cautious and focus on defense and protecting capital. Stay disciplined and sell stocks that are breaking support or have hit your stops.  Don't be in a big rush to bottom fish. The opportunities will develop, but we have to let the market weakness play out. Bounces should not be readily trusted, although V-shaped bounce have been quite common in recent years.

Stay nimble and opportunistic.



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