Embrace the Action

 | May 06, 2013 | 4:25 PM EDT
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The only thing you need to know about this market right now is "the trend is your friend." The indices are up for 10 of the last 12 days and hitting new multi-year highs. Even the bears seem to have given up trying to find reasons why this market is going to fall apart. There appears to be a huge amount of underlying support as underinvested bulls flail about looking for entries. It doesn't even have to go red before the dip buyers jump in and grab the bargains.

Volume was poor today, which tends to occur on Mondays, but breadth picked up nicely during the day as small-caps led the market. A few big-caps such as Apple (AAPL) and Google (GOOG) boosted the Nasdaq.

It is difficult to offer any new profound insights about this market action. It is the same action we've seen most of the year and you have to respect it and embrace it if you want to make money. It is easy to complain about it and find reasons not to trust it, but if you think too hard you can talk yourself out of some good trades.

Markets this strong don't just fall apart. Stick with the trend until there is reason not to.

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

May 06, 2013 | 2:20 PM EDT

Inertia Is Deadly

  • Doing something is better than doing nothing when you're on the wrong side of the market.

Once again, the market is drifting slowly higher as if there isn't a worry in the world. The very persistent one-way nature of this market in 2013 has been downright stunning, which is a big part of the reason why the momentum continues. Even though market players may not feel all that positive, they can't stand being left out of a rally of this magnitude so they slowly inch in and keep trying to put money to work in case it continues.

You can almost feel the strong underlying support out there. There is a big supply of buyers unwilling to chase but waste no time jumping in on weakness. When there's no weakness, many bite the bullet and pay up anyway.

I've seen a number of comments today from folks who have lost substantial amounts of money trying to short this market. It is tragic when that occurs, but you can't blame bearish commentators or pundits for your losses. You have to take responsibility for managing your losses and keeping them contained. There is nothing more important than being disciplined when you are on the wrong side of the market. If you are riding losses to the point that you lose a substantial amount of your capital, the problem isn't the market calls you are following but the way you are managing your trades.

Inertia is deadly when you are on the wrong side of the market. It is important to act when losses reach a certain point and not worry that your timing may be wrong. Doing something, even if it is timed poorly, is better than doing nothing when you are struggling.

May 06, 2013 | 10:26 AM EDT

A Good Market for Stock-Pickers

  • And keep in mind that big-picture negatives are totally irrelevant.

The market is moving slowly as we kick off the week and digest the big move Friday. Small-caps are leading, which is reflected in positive breadth of 2750 gainers to 2100 losers. Apple (AAPL) and Google (GOOG) continue to lead the big-caps while Amazon (AMZN) and Netflix (NFLX) struggle.

Chips and oil are the leading sectors while drugs and biotechnology take a breather. Solar energy names have done very well lately and there is continued follow-through in my two favorites, First Solar (FSLR) and SunPower (SPWR).

Himax (HIMX) is breaking to new highs as the debate over whether it is included in Google Glass continues. I have a technical buy this morning for Insmed (INSM), which is exhibiting good volume, and my stock of the week, YY Inc. (YY), is off to a good start.

The market is starting to find better traction and it continues to look like too many underinvested bulls are looking for entries. It is a good market for stock-pickers. Keep in mind that big-picture negatives are totally irrelevant for now.

May 06, 2013 | 8:28 AM EDT

Liquidity Trumps Logic

  • Friday's jobs news caught bulls and bears off guard.

An action doesn't have to be wrong just because it is not logical. It doesn't have to be right just because it has its logic. --Lion Feuchtwanger

Over the past couple of years, one of the biggest challenges of this market has been reconciling what is happening in the day-to-day economy with a stock market that acts like we are in one of the greatest booms ever. We hear constantly about slow growth, weak employment, struggling real estate and negative sentiment, yet the stock market continues to run up as if it doesn't have a worry in the world.

If you stick with the trend and respect the price action, you have had a good chance of dealing with this action. But if you have tried to apply logic, like many big-picture bears, you have had a very difficult time. What you have to realize is that liquidity is far more important than logic. What matters more than anything is that a lot of cash needs to go someplace and the easiest place for it to flow is into the market.

The jobs news on Friday changed the market dynamic a bit. We had a steady diet of weaker-than-expected economic news, including the weak ADP payroll numbers, before the better-than-expected jobs news Friday morning. This caught both the bears and the underinvested bulls by surprise and produced a powerful move. The fact there the market was already a bit extended and overbought resulted in quite a few folks being out of position.

What was particularly interesting was that the jobs news seemed to have shifted that attitude many had about the economy. There were many comments to the effect that maybe things really aren't that bad. Of course, this is just one report and there were some weak aspects to it such as hours worked, but what is going to be interesting is whether we start seeing other data points to back this up.

What has favored the bulls more than anything else lately is that so many people can't seem to embrace the market strength. They are fighting it and seem to be consistently underinvested. It creates a "wall of worry" dynamic. That results in very active dip buying and a strong trend as money keeps inching into the market even though sentiment remains very mixed.

What I find most challenging is that so many stocks are extended and not offering easy entry points. Even stocks with bases are at a third or fourth level and require chasing. If you aren't confident that the trend will continue, it is very easy to be too timid with your buying.

We'll see how well this market builds on Friday's breakout. Even if we pause, the likelihood is that there will be good underlying support. Markets acting like this don't just suddenly fall apart. We have weak seasonality setting in but that is just a tendency and not a certainty.

The number one thing to keep in mind is respect the price action and don't be overly negative until there is real price weakness.

We have a mild start and the focus will be on stock picking. Stay selective and focus on strong money management.

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