Still Plenty of Buying Interest

 | May 13, 2013 | 4:08 PM EDT
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The action was slightly negative, as was breadth, but there was still plenty of buying interest. Netflix (NFLX) and Tesla (TSLA) were chased aggressively most of the day and finished strong. There were very active pockets of momentum among biotechnology and solar energy. I was impressed with the action in many individual stocks that seemed to ignore the struggling indices.

The bears' spin on this action is that the market is narrowing and the speculative action is becoming frothy, but it is tough to dismiss this underlying buying support. It is possible this may lead to some topping action but I don't see any reason to be too concerned yet.

The bulls' spin is that once again the market was able to shrug off worries that the Fed may not keep interest rates low forever. That produced a poor start this morning but it barely lasted 30 minutes before the buyers stepped up. There was no fear that the Fed is about to produce a major market turn.

Technically, the market is still extended and there are plenty of stocks in nosebleed territory, but upside momentum remains strong and fighting the trend still doesn't work. There are reasons to be cautions, but the price action remains positive and stock-picking is working well.

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

May 13, 2013 | 1:31 PM EDT

Seems Like Old Times

  • Today's action reminds me of trading before the 2008-09 crash.

The action today reminds me of the good old days, before the crash in 2008-09. Some of the best trading days came when the indices were close to flat. Traders would gravitate toward a small group of hot stocks and if you caught them early in the day, you would do very well. It was action that rewarded stock-picking rather than big-picture thinking. That is particularly ironic today because the big news this morning was what that the Fed may think about tapering off quantitative easing.

Breadth continues to run negative with 2,300 gainers to 3,000 losers, but there is stunning strength such as Netflix (NFLX), SolarCity (SCTY), Noah Holdings (NOAH), 3D Systems (DDD) and a number of momentum favorites. It is the sort of action that we'd see when the action was not so dominated by computer programs but by hot-money momentum players instead.

I've been paring back into strength but I'm kicking myself because almost every sale seems to be premature.

One of these days, worries about the Fed tapering off its "accommodative monetary policy" will matter and we will see very aggressive selling. Today is not the day.

May 13, 2013 | 10:31 AM EDT

Dip-Buyers Taking Their Time

  • While he market mulls Fed chatter this morning.

The dip-buyers are taking their time as the market mulls the chatter that the Fed may not keep interest rates near zero forever. While there isn't any anticipation that the Fed is going to start raising rates any time soon, it still spooks the market when we start to contemplate what will happen if we don't have central bank support. The tendency is to shrug off these worries, but if you are looking for an excuse to lock in gains, this is as good as any.

Despite the red this morning, there are hot pockets of momentum. Tesla (TSLA) and Netflix (NFLX) are the big-cap leaders and there is plenty of follow-through in hot small-caps I've been discussing lately, like SunPower (SPWR), YY Inc. (YY) and Sarepta (SRPT).

Breadth is solidly negative with about 1700 gainers to 3100 losers but some stock picking is taking place, which is always nice to see. Biotechnology and solar remain the best sectors while gold, chips and commodities are the laggards.

My stock of the week, Ambarella (AMBA), is off to a very good start and I've added already shares and will look for more entries. Vertex Pharmaceuticals (VRTX) may finally be finding momentum buyers and I'm watching that for an add.

May 13, 2013 | 7:23 AM EDT

Time to Tighten Up

  • Let's see how this Fed scare plays out.

I'm looking for continuing signs of improvement in the economy. Sustained, ongoing improvement in the economy. --John Williams, president of the Federal Reserve Bank of San Francisco.

When Fed members start to talk about an improving economy the market only hears one thing: the end of quantitative easing.

Nothing has been more important to this market than the Fed's cheap-money policy, which means that we will see a reaction to any and all talk that things are about to change. Late on Friday the Wall Street Journal posted an article discussing how the Fed is developing a QE exit strategy. There wasn't anything very specific in the discussion, but this sort of article is typical of how the Fed starts to signal that a change in policy will eventually come. The Fed will try to prepare the markets with dozens of hints and comments before anything is actually done, but there is no way for the Fed to avoid negative reactions, as it indicates that the policy will eventual change.

There is no question we are going to see this sort of talk more and more from the Fed, especially as economic data start to strengthen. But the good news, from the market perspective, is that it is still widely believed that the economy is quite soft and not likely to really take off.  Employment is a bit better and housing has improved, but it is quite easy to find flaws in these reports if you dig just a little.

The article in the Journal is just the first of many that we will see about how the Fed will exit its stimulus program. The Fed has been quite effective at signaling, well in advance, what its intentions have been, so that when the actual policy change does take place, the market is already well prepared.

What is likely to occur is that we will have a little scare as a new hint is floated, but it will be shrugged off as it becomes clear that the timing is uncertain and nothing is going to happen for a while. We will then have more hints and more reactions and then, by the time the actual policy is changed, the market will have priced it in to some degree.

The issue for us to worry about now is how aggressive the market is going to be in pricing in a less friendly Fed at this point. Nothing is happening yet, and the Fed is being quite clear that it could even increase its bond buying if necessary, so there isn't any reason to panic at this point.

On the other hand, the market is technically extended and a bit frothy after a straight up move, so the stage is set for some profit taking. I don't believe the dip buyers are going to give up since they have had so few opportunities lately, but there are plenty of profits to protect and we'll need to tighten up to see how this Fed scare plays out.

We better get used to this sort of Fed news. We are going to see it quite often in the months to come, especially if economic reports are favorable.

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