Just Hold Your Nose

 | Apr 21, 2014 | 4:23 PM EDT
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The S&P 500 managed a fifth straight day of gains but it has not been a very healthy bounce. Volume has been declining and was particularly light today. Many of the leading momentum stocks have barely budged, but this looks very much like our old friend the V-shaped bounce.

What's surprising about V-shaped bounces isn't just the streakiness of the action but how they develop despite poor technical action. There are many good reasons not to trust low-volume bounces, but that is exactly the sort of move that has gained further momentum.

The longer action like this persists, the more it sucks in underinvested bulls on the sidelines who have been distrustful. It is "climb the wall of worry" action, and it has a strong tendency to last longer than seems reasonable. The addition of earnings season gives buyers an even better excuse to keep the V-shaped bounces going.

After the close, Netflix (NFLX) put up an OK report and Facebook (FB) received a price target of $87 from Credit Suisse. That is helping to keep sentiment positive, and with a slew of reports due tomorrow, there is a good chance we will see underlying bids tomorrow.

Technically, there are many reasons not to trust this market very much, but there is no denying that the pattern has proven itself repeatedly over the last couple of years. The best way to deal with it is to simply hold your nose and look for buys.

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

April 21, 2014 | 1:36 PM EDT

Feels Like a Summer Friday

  • With kids off from school, there aren't as many market participants.

The action today feels like a summer Friday. Mondays typically have lower volume but with many kids off from school this week, there aren't as many participants. The action isn't bad, but it is slow and rather random. I see very few stocks making big moves but there isn't much downside pressure either. It is just a slow drift, which can be fine for stock-pickers.

Speaking of stock picking, my stock of the week, Maxwell Technologies (MXWL), is plodding along nicely and is now at a new closing high on good volume. The story here is that they are a potential partner in Tesla's (TSLA) ultra-capacitor battery factory. I have no idea whether that is likely, but it helped to keep the stock in a tight base for the last six weeks and set it up for the move we are seeing today.

I'll be looking at a few things into the close for continued momentum, but it is extremely quiet and I would not all surprised to see late selling. Markets like this demand that we are highly selective and manage positions tightly.

April 21, 2014 | 10:24 AM EDT

The Hot Money Gets Busy

  • Speculative names are attracting some attention.

With Europe closed and many folks in no hurry to return to work after the long U.S. weekend, trading is off to a slow start. It is probably better that we didn't have a gap-up open as that would have been an invitation for quick flipping. We are instead seeing gradual interest and good underlying support, which is exactly what we need.

As I went through charts this weekend, I was mostly unimpressed. Momentum stocks did not recover well during last week's bounce and most of the small-caps that I favor have not done much other than hold support levels. Nonetheless, market recoveries have to tend to start tepidly recently and it has been dangerous to try to fight the action if it is not impressive technically.

The hot money is becoming a bit more active. Speculative names like Plug Power (PLUG), BioFuel Energy (BIOF) and my stock of the week, Maxwell Technologies (MXWL), are attracting attention. Big-cap technology names like Facebook (FB), IBM (IBM) and Twitter (TWTR) are acting better while small-caps Quantum Fuel Systems Technologies Worldwide (QTWW) and BioTelemetry (BEAT) are bouncing a little.

Fear of being left behind is trumping a weak technical picture and that is sucking in more buyers. We'll see if the bulls can keep on pushing.

April 21, 2014 | 8:39 AM EDT

Don't Get Too Complacent

  • A failed bounce is a distinct possibility at the moment.

"Long stormy spring-time, wet contentious April, winter chilling the lap of very May; but at length the season of summer does come." --Thomas Carlyle

After a much-needed holiday break, we have a busy week ahead: a full schedule of earnings, and plenty of news flow out of Russia, China and Japan. Most important, the major indices are at important technical junctures after having bounced back from the recent correction. The big question now is whether the bulls will continue to push and resume the uptrend, or if we have another failed bounce on our hands, like the one we saw on April 10.

Market players have become quite confident about the market's ability to quickly recover from the relatively brief corrections. According to Investor's Business Daily, the average correction since March 2009 has lasted only 12 to 13 sessions, and the market is currently close to that point already.

Last week came signs that folks were ready to declare that the worst was over. Market players inched back into a number of stocks on slightly better economic news, and we saw some typical holiday-type trading. The S&P 500 stopped right at resistance -- so now the question is whether the buyers will keep pushing the index upward in typical "V"-bounce fashion.

While the recovery in the indices does look promising, the big difference this time lies in the nature of leadership. Oil stocks have recently been the best movers, and before that it was defensive and conservative names. Key growth stocks, meanwhile, have not recovered well at all. Such names as Google (GOOGL, GOOG), Facebook (FB), Tesla (TSLA), Apple (AAPL) and Chipotle (CMG) have bounced little and are showing relative weakness. An article in the The Wall Street Journal today notes that a number of hedge funds are having a difficult time due to the poor action in key growth names.

One of the most dangerous things about the market is that many market players have grown complacent about the chances for quick and easy recoveries. For years now, skepticism has proven to be very costly -- once the indices start to bounce, the fear of being left behind yet again starts to bubble up. Nothing has been a stronger driving force than that fear, and as soon as we see a couple of positive sessions, the desire to put money to work builds up quickly.

Unfortunately, at some point this dynamic is going to give way to very ugly consequences. Eventually that quick and easy recovery won't materialize, and then we'll witness some real panic when a bounce fails and the trapped bulls look for an escape.

Failed bounces are what market corrections are made of, and given where the indices are right now, we must be very aware of that possibility. If the bounce starts to sputter out again, many folks will be looking to hit the exits quickly in order to hold on to some of the gains from the recent recovery.

A huge number of earnings reports are on tap, and there is potential for some news out of Europe about its version of quantitative easing.

In short, it doesn't look like a good strategy to count on this market to act as it did in 2013, when the indices quickly and consistently shook off any negative news. Vigilance and discipline are paramount to navigating this market effectively.

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