A Light-Volume Lament

 | May 05, 2014 | 4:25 PM EDT
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The buyers didn't seem worried that the market was about to run away from them, but they did stick around long enough to hold the market near the highs of the day at the finish line. Breadth improved most of the day but still ended up in the red. On the other hand, there was bottoming action in a number of small-cap names that have been downtrending for two months.

The big challenge this market presents is the inconsistency between the senior indices and most everything else. If you look at the DJIA, things look pretty good. But if you look at the small-cap indices or the Nasdaq, the market is still technically broken and we have a lot of work to do before the trend reverses back to the upside.

While the action today was generally good, it was painfully slow and that makes me worry about how things will play out this summer as volume continues to dry out. I've often said that bad markets tend to wear you down rather than scare you out, and light volume can be awfully tiresome when the indices don't do much.

Overall, the market is exhibiting signs of bottoming action -- nothing very dramatic, and it can be easily reversed, but at least we had underlying support and a good finish today. What was lacking was better energy.

Have a good evening I'll see you tomorrow.

May 05, 2014 | 1:30 PM EDT

Driven by Boredom

  • Don't buy just for the sake of doing something.

The indices have come back from a weak open but traders are yawning and using the words "slow" and "boring."  Breadth is still on the weak side and while there are a few pockets of green, it just isn't very energetic.

After being out part of last week I'm itching to put cash to work and be more active, but there isn't much developing right now.  It continues to surprise me how lifeless small-cap stocks are. There are no signs that value buyers are starting to nibble and many of the thinner names just keep drifting downward with no underlying interest.

The important thing is to be selective and not to buy positions just for the sake of doing something.  Traders often tend to err on the side of staying active and that is the easiest way to lose money in a choppy market.

The action is starting to roll over a little and we'll need the buyers to make a late run for the bulls to proclaim victory. So far, boredom is dominating the action.

May 05, 2014 | 10:53 AM EDT

Off to a Good Start

  • There's some bounce in key momentum names.

The dip-buyers are taking advantage of the poor open, which is what we need to put good support under this market. A gap-up open that fails tends to happen during downtrends, so this is a good start to the week.

Breadth was better than 3-to-1 negative early, but it has improved to about 2-to-1 negative, which is mainly a function of small-cap weakness. Biotechnology is leading to the upside with some bounce in gold and silver as well. Solar energy, steel, retail and builders are all a bit soft. Most important, there is some bounce in key momentum names like Tesla (TSLA), Chipotle (CMG) and Facebook (FB).

I was away a few days last week so I'm moving slowly as I try to get back in tune with the action. It really is surprising how bad the bounces have been in many small-caps, but there are signs of bottoming in big-cap momentum names. It still concerns me that the DJIA and S&P 500 haven't corrected like the broader market, but buyers are showing signs of not caring.

I'll be looking for new buys later today.

May 05, 2014 | 7:38 AM EDT

The Average Stock Tells a Different Tale

  • Despite the action in the indices, this is a market in correction.

"I'm not upset that you lied to me, I'm upset that from now on I can't believe you."

-- Friedrich Nietzsche

Since the beginning of March, the major theme of the market has been one of inconsistent and uncorrelated action. While the S&P 500 and Dow have given the impression that the market is in great shape, with new all-time highs within shouting distance, under the surface stocks have been moving in random and choppy fashion.

The market is reminiscent of the tale of the blind men and the elephant. In the story, a group of blind men touch parts of an elephant to understand how it looks. One touches the tusk, another the ear and another the trunk or the leg. They individually conclude that the elephant is like a tree branch, a leaf, a snake or a tree trunk. They are each correct to some degree, but they are all missing the big picture.

What is most interesting in the current market is how many commentators don't seem to recognize the different pieces of the market. Many seize on the Dow or S&P 500 and conclude that the market is in fantastic shape. Still other market players have a totally different picture of what this market looks like, perhaps with a primary focus on momentum stocks, small-caps, speculative favorites and hot sectors such as biotechnology and solar energy.

This lack of correlation among stocks represents a major change. Over the last five years, equities have often tended to move in tandem with some momentum names, which were leading most of the time. If you traded in the direction of the overall indices, you did fine, and individual stock-picking didn't matter much.

I'm a fan of a market that rewards stock-picking, but the problem we have now is that the quality of the leadership isn't what normally leads the market to the Promised Land. Money has come out of the "hot money" names and flowed into conservative and defensive areas. The Dow bulls have no issue with that but, as I've pointed out recently, Procter & Gamble (PG) and Johnson & Johnson (JNJ) aren't the types of stocks that have led sustained rallies. They are names where nervous funds park cash.

The most worrisome aspect of recent action is the degree to which many individual stocks have corrected. The carnage has been stunning in small-caps and momentum names such as Amazon (AMZN), and this action would be attracting some blaring headlines if the senior indices weren't covering it up.

All you really have to know right now is that the average stock is undergoing a correction and acting poorly. There are always some exceptions, but upside trading is very challenging right now, and it is easy to be burned if you are too aggressive in trying to catch reversals.

My game plan here, therefore, is to respect that the market is in a correction, and to be very conservative in making new buys until we see better action. The bulls are ready to proclaim that this market is healthy and poised to run, but individual stocks are telling a very different story.

Monday morning, we're seeing a bit of early pressure on more problems in Ukraine and some weak China data. However, it may be a positive that the market isn't head for a gap-up open that would invite in the sellers.

Columnist Conversations

I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
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