Bulls on Parade

 | May 03, 2013 | 4:23 PM EDT
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Even the bulls were surprised by the market rampage following the better-than-expected monthly jobs report. Expectations had come down following the very poor ADP employment report Wednesday and that caused a mad scramble for more long exposure when not only the April numbers were well ahead, but prior months were revised upward.

Market players were already struggling to keep up with this liquidity-driven move that never seems to offer any easy entry points, so the big gap-up this morning caused quite a bit of additional frustration. In a normal market, that sort of open would invite selling and profit-taking, but in this environment it just creates a huge supply of potential dip-buyers who help keep a very strong big under the market.

Probably the most important thing to keep in mind is that markets at their highs don't just suddenly fall apart and go straight down. They tend to stay strong as cash on the sidelines tries to find entry points.

Don't short this market just because you think it may have run too far, too fast. It is very easy to underestimate the power of momentum, especially when there is so much cheap money out there. As I've often written, markets have a tendency to run up much further than seems reasonable. Don't try to impose your thinking about what is "reasonable" on the market.

It may be trite and simplistic, but the old saying "Don't fight the trend" is really all you need to know about this market now. The bears may grumble about why it's unjustified, but the price action just doesn't care.

Have a great weekend. I'll see you on Monday.

May 03, 2013 | 10:47 AM EDT

To Infinity and Beyond?

  • This market's momentum isn't going to die easily.

The better-than-expected jobs news has given us a frenzied open, but we are starting to settle down a bit as the flippers exit and the hungry bulls hunt for entries. The DJIA has exceeded the psychologically important 15,000 mark for the first time ever and that is calming down the action a little. Bears won't touch the market with that target out there, but they may start to think about trying to call a top once again.

The poor ADP news likely lowered expectations and caused poor positioning that contributed to the big gap-up open. Major performance anxiety is going to help keep a strong bid under this market.

If you are disciplined trader it is tough not to do some flipping into a gap-up open like this. Unfortunately, many folks are underinvested and don't have much to flip. That keeps the pullbacks from the opening highs very shallow and helps to produce a trend day. Right now, it looks like we have a very good shot at holding up all day and maybe even accelerating late in the day. Typically, if it doesn't don't pull back early in the day, it ends up gaining momentum as bulls decide they have no choice but to chase.

I have not been able to put much money to work but a few things I'm eyeing are Green Mountain (GMCR), SunPower (SPWR), FleetCor (FLT) and Insmed (INSM). I'll be looking to put more money work later in the day. I don't think this momentum is going to die easily.

May 03, 2013 | 8:44 AM EDT

Drowning in Liquidity

  • The supply of cheap cash trumps everything else.

Our liquidity is fine. As a matter of fact, it's better than fine. It's strong. --Kenneth Lay, former CEO of Enron

The biggest positive for this market is that almost everyone agrees the central bankers are providing tremendous underlying support with their cheap money policies. Everyone knows there is a flood of cheap capital and one of the few places it can go for a return is into the stock market.

Virtually every financial publication has mentioned this phenomenon. Many market players have taken the stance that nothing else matters. In view of how fundamentals, economics and chart patterns have been ignored, this stance is not unreasonable.

The action yesterday was a good example of how liquidity is driving the action more than news flow. The ADP report, which drove markets down Wednesday, was immediately forgotten with slightly positive weekly unemployment news. It wasn't anything compelling but the nature of this market is that as soon as there are upticks, the fear of being left behind causes underinvested bulls to rush back in and drive the action straight up. I suspect they are aided by computer programs that profit from short-term momentum and make V-shaped moves even more V-ish.

One thing that really helps this market is that many people are struggling with the disconnect between the world economy, which is moribund, and a stock market that is acting like everything is fantastic. The only way to reconcile the two is to appreciate the power of liquidity, which many market players struggle with. It is very hard for some to understand that the supply of cheap cash trumps everything else that you normally consider when investing in stocks.

If you are a contrarian, the near-universal idea that liquidity will keep driving is a worrisome sign. Typically, when everyone is convinced of something you have to start looking for toppy action. However, many people have not acted and still struggle to stay invested. If the market mood was more positive, I'd think about the contrarian situation more, but it is apparent that people are skeptical and "climbing the wall of worry."

It is a very odd market environment and many seasoned pros are struggling to understand it. The best strategy for dealing with it is to maintain a bullish bias and to defer to the price action. The worst thing you can do is to keep trying to anticipate a top or a turn. Don't even think about it until there is real weakness.

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



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