Sailing on a Sea of Liquidity

 | May 15, 2013 | 4:33 PM EDT
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This very strong momentum continues, but even the bulls looked weary today as the market topped out midday before another strong close. As has been the tendency, it started slowly with negative breadth but the buyers became more aggressive as it became clear this market was not ready to roll over.

I was listening for the term "blow-off top." Though it was another positive day, it wasn't frenzied enough and the dip buyers are still buying enough to prevent any sort of strong reversal. The bears are going to point out that breadth hasn't been so great but that is offset by strength in key big-caps like Google (GOOG) and Netflix (NFLX). Solar energy remains the top hot money group but there is no shortage of strength in individual names.

The dilemma of this market is if you are disciplined and do some selling, it is extremely difficult to put idle funds back to work, especially if you don't like to chase new highs. The S&P 500 is now up 16 of the last 19 days and becoming increasingly overbought.

What is interesting is that the mood isn't the sort of frenzy that you normally associate with a runaway market but one of resignation that there are forces at work that have rendered any negatives irrelevant. If you don't accept that we are sailing on a sea of liquidity and little can stop it, you are going to have problems.

I'd really like to see downside momentum to shake things up, but the market doesn't care one bit what I, or anyone else, would like. This market favors holding and doing very little, which is tiresome for traders who want to be aggressive.

One of these days this trend will end and we'll regret that we didn't take better advantage of it while we had the chance. We must do what we can to profit from this trend even at a stage that seems downright ridiculous.

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

May 15, 2013 | 1:27 PM EDT

Back to the Future?

  • The current market bears an eerie resemblance to the 2000 bubble.

Every market is driven by different factors so I don't usually pay much attention to comparisons to past periods. But I can't help feeling that the current action is similar to what we saw in early 2000.

One similarity is how the Fed had created a huge flood of liquidity back then on fears of a Y2K computer glitch. The idea was to make sure plenty of cash was floating around so that if there were any banking issues, they could be dealt with more easily. Of course, much of that idle cash found its way into the stock market and helped push it straight up.

Many other factors contributed to the move, such as the great Internet boom, but the action often felt similar to what we are seeing today. It was straight up and buyers were panicked about being left out.

The chart back then looked like this:

Source: TCNet

We haven't had as much of a frenzy this year, but the recent move does look quite similar. What is most striking is how the degree of the move is still relatively small compared to 2000, which is one of the reasons I keep repeating that you can't try to anticipate a top here.

Source: TCNet

Things will eventually turn; it's inevitable. When it does , be ready to change the way you operate. The next chart shows what happened when the bubble burst in 2000.

Source: TCNet

The main take away from these charts is it's impossible to time a top accurately, but when conditions change and turn downward, you must react quickly and make sure you shift your thinking along with the conditions.

May 15, 2013 | 10:33 AM EDT

What's On My Radar

  • I wouldn't mind some consolidation here to get new setups in these names.

The pattern lately has been a very slow start that picks up steam as the day progresses. The market players who are thinking it might be the day we finally pull back see that it isn't going to happen so they shrug their shoulders and join the party -- again.

Breadth is negative and lagging again, but the hot money is aggressively chasing big-cap names Google (GOOG), Netflix (NFLX) and LinkedIn (LNKD). Underlying support continues to feel extremely strong and there is plenty of chasing taking place.

SunPower (SPWR) for example, which I've highlighted in the last few weeks, has a fresh breakout following strong guidance. This was well-anticipated news that I thought might produce some "sell the news" pressure, but that is obviously a quaint, old-fashioned concept that no longer applies in this market.

My main new buy this morning has been Insmed (INSM), which is running on a target price of $21 from Lazard. I have absolutely no respect for target prices but when they are nearly double the current price they do tend to bring in buyers.

Ambarella (AMBA), my stock of the week, is bouncing back strongly this morning. It was jerked around mercilessly yesterday but the buyers are pushing it back up today.

Other stocks on my radar include Himax (HIMX) and ACADIA Pharmaceuticals (ACAD), but I have to admit I wouldn't mind some consolidation to get some new setups.

May 15, 2013 | 8:18 AM EDT

How Long Can This Go On?

  • This one-sided action is not easy to trade.

Pride gets no pleasure out of having something, only out of having more of it than the next man. --C. S. Lewis

The question, once again, is how much longer can this ridiculously strong market continue to run? The answer, once again, is much longer than most people think is reasonable. We are hitting new highs and setting more records for extreme behavior and there really isn't any good reason to expect things to turn other than it would be logical and helpful to take a rest.

Yesterday, hedge funder David Tepper confirmed what we all know already, which is that this market is awash in liquidity that has no other place to go. Even though we have been running on that fact for quite a while, the acknowledgement that there is no end in sight gave the market another boost. Shorts continue to be crushed and underinvested bulls keep trying to find ways to put money to work.

The easy thing for pundits to do is to find reasons why this market is going to come crashing down suddenly. Given the propensity of market prognosticators for seeking attention it is quite tempting to make very load and bold calls that the end is near.

The big problem for many of the bearish gurus is that they have been doing this all year using the same arguments and have been dead wrong. If they stick with their position they will be right one of these days but they will be buried so far in the red that they won't breakeven for a very, very long time.

To effectively navigate this market there are two things you need to do. First is to ignore the market pundits. Macro matters are irrelevant, bearish arguments are useless and overbought technical indicators have no impact. You can come up with all sort of good arguments why this market is going to stumble but they are meaningless for now.

The second thing you need to do is to embrace the price action and not fight it. That is much harder to do than it sounds but if you stick with the trend and don't question it until there is a shift in the action you can make some money. That doesn't mean that you aren't skeptical and vigilant but you have to respect the fact that we are still running and not treat it as if it is totally moronic.

This sort of one-sided action is not that easy to trade. Frankly, I'm very tired of it. When we are straight up 15 of 18 days and haven't had a decent correction in many months you start to wonder why you even try to trade. If you just bought some index exchange-traded funds and rode them, you would probably be outperforming the vast majority of active traders who never have the benefit of downside action these days.

We have another quiet start this morning, which has been a good omen. We seem to consistently gain strength throughout the day as market players give up the hope that we might actually pull back a bit. I'm going to keep looking for new buys and will continue to ignore the pundits who really have no clue what this market is going to do.

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