A Market Full of Surprises

 | May 07, 2014 | 4:21 PM EDT
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What continues to be so surprising about this market is how uncorrelated the action has been. Many traders were shocked at how the Dow continues to outperform while Nasdaq and momentum stocks grossly underperform. The Dow is close to kissing new highs while the (IWM) struggles below its 200-day simple moving average.

Stocks like Verizon (VZ) and Johnson & Johnson (JNJ) are driving the Dow up while stocks like Google (GOOGL), Amazon (AMZN) and Apple (AAPL) drive down the Nasdaq. One list of key momentum stocks from early March is down 25%, while during the same period the Dow is up a small amount.

Big, conservative funds must love the relative strength in some of these lethargic big-caps, but the strength there is showing few signs of spreading. In a strong market, leading stocks drag along other stocks as they run higher.

In the current market, the momentum buyers have disappeared and the only thing keeping us going is the desire to park idle cash in "defensive" names. It makes for good headlines when you just look at the Dow, but it makes for massive underperformance if you own an "average" stock.

One thing traders seem to agree on is that this is a very unusual market. Seldom do the indices and so many individual traders seem to move in different direction.

Although the Dow was green, the corrective action is continuing. There are too many broken stocks and not enough good leadership for the broader market to reverse quickly. I'd like to be more encouraging about this market but it is misleading. It is a good time to take it slow and wait for the market to make up its mind.

Tesla (TSLA) earnings beat expectations but the news was so well-anticipated that the stock is selling off.

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

May 07, 2014 | 12:42 PM EDT

A Tale of Two Markets

  • How much longer can this two-tiered action continue?

The tale of two markets continues. The Dow is hitting new all-time highs while the Nasdaq, momentum stocks and small-caps look like death. We did see a pretty good bounce off the early lows and breadth has moved to flat, but money continues to move into defense and safety and out of anything that performed well last year.

The bulls call it a healthy rotation and stay focused on the Dow, while the bears look at the carnage in momentum-land and wonder how much longer this two-tiered action can continue. It has been my view that good markets don't have leadership like this one, and that the action is prolonging the corrective action that was sure to occur sooner or later.

While it is good to see the intraday reversal to the upside this morning, it is still extremely difficult to find good charts. There may be some bounce plays, but very little in the way of trend trades. Small-caps in particular have been so brutalized that they are going to need more than just a little intraday reversal to set them on the right track.

Still, no new buys for me. But I'll be looking at a few things near the close if it looks like we may go out close to the highs. I'm not feeling much trust.

May 07, 2014 | 10:18 AM EDT

Falling Into the Abyss

  • The ugly market action continues.

While the Dow is trading higher, the very ugly action in the broader market continues this morning. Breadth is running negative and the iShares Russell 2000 (IWM) didn't even bother to bounce before it rolled over. Market players are very willing to sell strength these days, which is something that was rare last year.

What is most worrisome is how so many stocks are lacking any good underlying support. The dip buyers went into hibernation and value buyers seem focused on just a few of the big-cap Dow names. There just isn't any interest in trying to catch the growth and momentum names that have been slaughtered for weeks. Buyers are just stepping aside and watching the stocks they used to love fall into the abyss.

I've taken a couple stops this morning and I am maintaining a very high level of cash. I have no interest in building anything long until we start seeing better action. There are usually a few longs that will stick out but in this market, you can't chase them.

Stay patient and this will eventual play out. But for now, don't be in any big rush to put cash at risk.

May 07, 2014 | 7:36 AM EDT

Ignore the Dow and S&P

  • The average stock is acting very poorly.

"There are two ways to be fooled. One is to believe what isn't true; the other is to refuse to believe what is true." -- Soren Kieregaard

Back at the start of 2014 I predicted that we were unlikely to have the sort of V-shaped bounces like we had in 2013. The logic was simple. The Fed was starting to taper its bond buying and conditions that supported such lopsided action was changed.

That prediction proved spectacularly wrong in February when we had one of the sharpest V-shaped bounces yet.  Despite tapering, Janet Yellen had given the market hope that the Fed would stay friendly for a while longer and that was the catalyst for another straight-up move.

After that bounce finally fizzled it in early March the character of the market has undergone a sharp change. The bulls have stayed focused on the Dow and the S&P 500, which have held up well, but the Nasdaq and small-cap indices have undergone a robust correction and have seen at least five failed bounce attempts.

The action yesterday was the latest failed bounce. We had a couple of mild positive days that had the bulls hoping that a bottom was forming, but then broad selling on increased volume hit again. The IWM ended up breaking below its 200-day simple moving average for the first time since 2012.

What has been particularly difficult about this market is how the S&P 500 and Dow continue to cover up some of the most severe corrective action we have had in a couple years. The media that focus on these misleading indices barely acknowledges the pullback that has occurred. It is keeping sentiment more bullish than it should be and is preventing the market from making a good low.

Many individual stocks, particularly momentum and small-cap names, have corrected enough that it wouldn't be surprising for them to find some support, but the two-tiered nature of the action is preventing this from happening. Rather than start to do some bargain hunting, buyers continue to move into safe and conservative stocks that are holding up the senior indices. That prevents the building of bases in the broken stocks and delays the correction that will occur at some point in the senior indices.

In order to navigate this market right now, you simply have to ignore the Dow and S&P 500. They are misleading and deceptive. You have to stay focused on the average stocks and monitor what is going on with momentum names and other stocks that tend to be leadership in good markets.

The average stock right now is technically broken, which is all you really need to know to take a defensive posture. The Nasdaq and small-cap indices are in clear downtrends and so is much of the entire market. 

My view for a while has been that the defensive names that are holding up the senior indices are not quality leadership and will not led the junior indices back up. We will not see this market make a good tradable low until we have better corrective action in the Dow and S&P 500.

The Investor Intelligence poll this morning shows a slight increase in bullish sentiment and a decrease in bearish sentiment. That is most likely a function of the media focus on the senior indices and the message that there really is nothing wrong with this market.

The average stock is acting very poorly and there is no reason to believe that we are about to embark on a new uptrend. Protect capital and play defense until market conditions change.



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