Still in a Downtrend

 | May 13, 2014 | 4:41 PM EDT
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The DJIA finished in the green for the fifth day and hit another all-time high, but it is useless as an indicator of overall market action. Breadth was solidly negative with about 2,250 gainers to 3,450 decliners, and it was slow, boring and very random trading. We didn't take any big hits, but it was not very interesting.

What is particularly bothersome about the market is how little speculative interest there is. Momentum and small-cap stocks had a good bounce yesterday for the first time in quite a while but there was very little follow-through today. Small-caps in particular were weak and the Russell 2000 ended up closing at the lows of the day. There just isn't much interest in trying to bottom-fish these stocks, even though many are well off their highs and do not have extended valuations.

Part of the issue now is seasonality as we enter the slower summer season, but I suspect that we are also starting to see the fallout from the Fed's tapering program. There isn't an endless supply of cash providing support and energy for V-shaped bounces.

Overall, the majority of stocks are still in a downtrend. The DJIA is simply prolonging the agony of this correction by keeping sentiment much higher than it would otherwise be if the stocks in that index had corrected like the average stock.

The best course of action is simply patience. That isn't very exciting and doesn't produce big gains, but there are few alternatives while we wait for market conditions to shift.

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

May 13, 2014 | 1:12 PM EDT

Not Enough Brave Bulls

  • There aren't any pockets of speculation.

The indices aren't doing much today and breadth has turned solidly negative, but what makes the action feel so pathetic is that there aren't any pockets of speculation. Flat markets are great for trading when the hot money finds small areas of interest. You might have a hot sector or some names running on news. It might not be limited to a very small number of stocks but at least there is the potential to knock out some good trades.

Unfortunately, this market is offering very little. There don't seem to be any good pockets of speculative momentum. We don't have a single sector or group that is attracting interest. There is some money flowing into defensive names, which keeps the DJIA plugging along but as far as speculation in small stocks, there is almost nothing going on. When something does move, traders are so anxious to take gains that they flip to death before it can really start moving.

There is nothing particularly unusual about this. It is the nature of the market at times and we just have to wait it out. Conditions will change and new opportunities will arise but the market is going to test us our fortitude for a while and see if it can drive us nuts as we keep looking for some good tradable action.

We'll see how we look in the final hour, but buyers aren't exhibiting much of an appetite. Buying will beget buying but, right now, there aren't enough brave bulls to get things rolling.

May 13, 2014 | 10:37 AM EDT

Digging for Action

  • But I see very little that is enticing.

There's green on the screens, but the follow-through attempt is tepid so far. Breadth is running just about even and there isn't much chasing. A few momentum names, like Facebook (FB), Google (GOOGL) and Green Mountain Coffee (GMCR), are seeing some continuation, but small-caps are dragging again and the hot momentum money doesn't seem interested in additional buying.

The biggest danger in a struggling market is being sucked into a bounce that fails. It is understandable how there is a sense of relief when many broken stocks bounce like they did yesterday, but the hope that the worst is over can be extremely dangerous. In a bear market, the faint stirrings of hope are crushed over and over again.

I don't want to sound overly negative but there aren't many good reasons to be too trusting. The market has done little to correct the technical damage found under the surface of so many stocks. The DJIA and S&P 500 continue to hide what is really going on in this market, which isn't very good when you do some digging.

I'd prefer to bet on another V-shaped recovery and a move back to the highs for the Nasdaq and Russell 2000, but I'm not seeing many signs that that is likely.

Maxwell Technologies (MXWL), which I mentioned yesterday, is inching up and I've sold down some FB in to strength. I'm digging for action but continue to see very little that is enticing.

May 13, 2014 | 8:21 AM EDT

The Bulls Have the Ball

  • However, further progress is going to take some effort.

Our ability to adapt is amazing. Our ability to change isn't quite as spectacular. --Lisa Lutz

On Monday, many momentum and small-cap stocks enjoyed their best performance in several months. The Nasdaq and the Russell 2000 led to the upside, although the S&P 500 and Dow Jones Industrial Average were strong enough to manage new all-time highs.

Is the rotational correction that has slaughtered so many individual stocks finally coming to an end?

The first thing that the bears will point out is that volume wasn't anything special. While breadth was quite good, it was little more than just a routine oversold bounce in some stocks that have sold off quite a bit over the last couple months.

The bull's response is that this is exactly how all of our V-shaped bounces have started. They look technically suspect at best but then they keep on going. They slowly draw in the skeptics who are convinced that the market can't possibly recover as quickly and as easily as it has previously.

The bears do seem to have a stronger case this time. The conditions that have supported V-shaped bounces have shifted. The Fed is slowly withdrawing its monetary accommodation and we are entering the seasonally poorest time of the year. Earnings season was tepid at best and the endless bids and automatic dip-buying has dried up. Our economic recovery is still moribund but that hasn't changed for several years now.

The bulls will argue that stocks are generally still a good value. Some of the air has come out of the momentum names that had become a bit frothy but valuations aren't particularly stretched and there are some attractive dividend yields if you are looking for safety. The strong action in the DJIA and S&P 500 prove that there is still plenty of cash looking for a place to go and that should eventually spread to some of the stocks that are starting to find support.

From a trading standpoint, the first day or two of a bounce can be particularly tricky. While there will be some charts that are oversold and ready to bounce, the overall technical patterns don't suggest that there will be sustained upside. It takes more than just a couple days of positive action for a stock to correct the technical damage that has been done over the course of a couple months.

Trend traders should be slow to embrace the market at this point. There is no reason to trust a bounce, although that has proven to be quite frustrating in the past when the market delivers these one-way, V-shaped bounces. Nonetheless, the prudent move is to stay skeptical and not be too trusting.

Keep in mind that the goal is to load up positions when they have the best chance of a sustained move. Too many market players focus on trying to catch the exact low of a downtrend and they end up being too heavily invested too quickly. While the goal of timing the bottom is understandable, it is important to keep in mind that the way you really make money is by catching a trend and riding it for a while. Doing some quick market timing flips can be profitable, but to make the big money you need a market trend that lasts for more than a few days.

It seems we will see a slightly positive start as the market considers news out of Europe that Germany is supportive of further stimulus -- including negative interest rates on savings. The bulls have the ball at the moment but further progress is going to take some effort.

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