Good Old-Fashioned Fear

 | May 09, 2013 | 4:22 PM EDT
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The computer programs picked up on the words "Fed" and "tapering," which was enough to produce the biggest pullback of the month. The chatter was either that the Wall Street Journal was going to publish an article about the Fed tapering off QE or that one of the most dovish Fed members made comments indicating he wasn't sure QE could continue forever.

Since endless Fed-created liquidity is the primary driving force behind this straight-up move, any comment, no matter how vague, causes an immediate reaction. Nothing spooks this market more than the idea that the Fed may actually look to exit its QE program.

Frankly, it is refreshing to see some good old-fashioned fear, even if it is just for a few minutes. What makes this market so hard to trade at times is that human emotions just don't seem to exist. Even the selloff today was largely driven by computers that pick up Twitter chatter and launch sell programs. Humans don't have time to react before the computers take control of the action.

I welcome anything that shakes the market up a little. We need volatility to give us better opportunities as it has become more difficult to put money to work. A few pullbacks will make for much better trading.

We'll see if the bears can manage any follow-through, but I continue to suspect that there will be very strong underlying support. Don't look for this market to fall apart. If it does top out, it is going to take time to develop.

Have a good evening I'll see you tomorrow.

May 09, 2013 | 1:47 PM EDT

Support Kicks In, as Expected

  • Once again, the trend is your friend.

We are seeing a good illustration of what I discussed in my earlier post: Strong markets tend to have very good underlying strength. The market started to roll over mid-morning but support kicked in and now it is back to the highs of the day.

The indices aren't flying and breadth is negative, but buyers are still active trying to pick off new ideas. The short squeeze plays are particularly active with names like lululemon (LULU), Netflix (NFLX), Tesla (TSLA) and Green Mountain (GMCR) leading the market.

As noted in the comment section of the blog, I added some SunPower (SPWR) this morning. The company has an analyst day next week and will issue guidance. Expectations are high and I'm looking for this breakout move to hold into that event.

The tendency of this market recently has been to close strong, and it is trying to break out to the upside again as I write. If there are any bears left, they are going to be squeezed even more. Once again, I'll remind you of this trite but true adage: "The trend is your friend."

May 09, 2013 | 8:20 AM EDT

No Reason to Relent

  • The dip buyers will keep coming until they get burned a few times.

When we have had the sort of momentum we've seen lately, the market tends to stay sticky to the upside. Too many are on the sidelines trying to find entries, and they keep the pullbacks very shallow.

This is one of the reasons it is often said that tops are a process. Markets don't just reverse and go straight down unless there is highly unusual news. It takes a while for the dip buyers to relent. When we have the sort of lopsided action we've seen lately, there is no reason for dip buyers to relent. They are going to keep coming until they are burned a few times, so I would not be in a hurry to think about tops.

We are seeing mild selling now, but I suspect that the dip buyers are champing at the bit and won't let things slide too far before they give it a go. Breadth is poor and gold, oil and commodities are leading to the downside.

Strength is coming from a number of heavily shorted names including Green Mountain (GMCR), Tesla (TSLA), Intuitive Surgical (ISRG) and Groupon (GRPN). YY Inc. (YY), my stock of the week, is up 32% this week and trying for another high. I continue to struggle to put new cash to work, and I'm not going to force it.

May 09, 2013 | 8:20 AM EDT

'This Time It's Different'

  • My patience waiting this market to change is running thin.

The four most expensive words in the English language are 'this time it's different.' --Sir John Templeton

Every market presents challenges, but none more so than the current because of the expectations it creates. With the indices up 12 of the last 14 days, it would appear to be a fantastic environment for market players: Buy just about anything and watch it run higher.

While many folks have done just that, those who attempt to trade the market actively have had a much more difficult task. There is almost no volatility, which is a great detriment to traders attempting to move in and out as the market bounces around. There are plenty of opportunities to sell into strength but very few to buy on weakness. Many traders jokingly grumble that every sale lately has been a mistake.

There is no great mystery about what is happening. The way the market operates has changed since the bottom in 2009. Human emotions have been replaced with a flood of liquidity and computer-driven algorithms.

If you expect the market to act in a "reasonable" manner, you have very likely been very frustrated. Greed and fear don't apply like they used to. The biggest fear that exists is having too much idle cash and being underinvested. No one is worried about a crash or even a correction because the central banks have virtually guaranteed that they will continue to support the market endlessly with cheap capital.

Normally, fears about the economy stir emotions, but in the current environment there are no worries because of the endless support of central banks. Bad news is actually a positive because it keeps the printing presses going. And good news isn't good enough to slow things down.

At some point, the central banks will have to start withdrawing their accommodation, and many market players are fearful of what will happen then. It has been a mistake to anticipate this event, and those who keep trying to short bonds in anticipation of rising interest rates have done very poorly.

The best way to deal with a difficult market environment is to recognize what is going on and not fight it. Too many market players keep trying to anticipate a major shift and pay a big price for it. It is hard enough to ride this one-way trend, but it is a disaster to fight it.

I'm struggling because this market simply does not work well for my active trading style. I see very few opportunities to put new cash to work with everything elevated, but there is no way I'd short a market with this sort of positive momentum.

I always say that if you wait, the market will eventually shift and the action will change, but I am starting to wonder if "this time it's different." I'm kidding, but my patience is running thin.

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