Slightly Negative but Still Frothy

 | May 20, 2013 | 4:20 PM EDT
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It was a peculiar day of trading with the senior indices slightly negative but frothy action in select small-caps. The solar energy group was a particularly good illustration of how the hot money is happy to chase without regard to fundamentals or valuation.

At this stage of the move, market players are most concerned that there is a sufficient supply of buyers to keep pushing stocks higher. There is no shortage of warning signs and negatives but as long as there are buyers willing to chase it pays to stick with the momentum.

The outperformance by small-caps is very likely to be seen by bears as a symptom of speculative excess. With the market as extended as it is, it would be surprising if there wasn't some speculative frenzy. The question is when will it matter?

Many disciplined traders are complaining that all their sales seem to be premature lately, but that is the price we have to pay at times. Every good money management methodology requires that you lock in gains at some point. You are never going to time sales perfectly and that is especially true when you have a market acting this way.

It wasn't a great day for the market but we are in desperate need of rest and consolidation. A little weak action is actually good news at this point.

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

May 20, 2013 | 2:05 PM EDT

Small-Caps Out Front

  • A sign of frothiness.

Other than the continued lack of selling, the most notable aspect of today's trading is that small-caps are outperforming. While the senior indices are flat to down, the iShares Russell 2000 (IWM) is acting well and overall breadth is 3,100 gainers to 2,300 decliners. Biotech and homebuilders are struggling a little but there isn't any major selling taking place. Gold and silver reversed sharply to the upside intraday and solar energy continues to be a hot pocket.

The bears' spin is that small-cap leadership is a sign of frothiness. When speculators start looking at junk, things are a bit too frothy. Of course, it is tough to take any bearish argument very seriously since they have been so consistently wrong for so long.

The problem for the bears isn't coming up with negative arguments but timing when they might actually matter. One of these days we will have a very ugly day and it will be because the market suddenly decided that it was going to embrace something negative. Most likely, it will have something to do with the Fed and the tapering of QE, but it is not possible to time when that will occur.

I keep making sales into strength and then feel foolish when stocks keep running. In the old days, we'd have great opportunities to remount stocks on pullbacks but this action continues to reward those who just buy and hold.

We are testing the day lows as I write but breadth is still quite good. It is tough to be too worried with small-caps holding up as well as they are.

May 20, 2013 | 10:30 AM EDT

Trumping Market Skepticism

  • Buying inevitably kicks in.

The tendency of the market lately has been to start slow and gain strength. Once market players see the bears are still toothless, they put money to work so they don't miss out. We always have a little skepticism early since the market is so extended, but the attitude shifts to "If you can't beat them, might as well join them" and buying kicks in.

So many stocks are extended it is a challenge to make prudent buys, but if you do catch one that is just starting to break like Ambarella (AMBA), which I highlighted last week as my Stock of the Week, you can catch very good moves. Others that I've mentioned lately that are doing well are SunPower (SPWR), Insmed (INSM) and ACADIA Pharmaceuticals (ACAD). This week's Stock of the Week, Revolution Lighting Technologies (RVLT), which I highlighted Friday, is breaking out to start the day.

One theme I've been watching for a while is natural gas shipping. The Energy Department just approved a new facility for natural gas exports but there isn't much movement in the two main plays in that area, which I discussed a while back. I added to GasLog (GLOG) this morning and I am keeping an eye on StealthGas (GASS), which needs some work. It's a longer-term theme that I think will work with patience.

We are hitting intraday highs as I write, which goes to show how tough it is for the bears to fight the momentum.

May 20, 2013 | 8:25 AM EDT

No Kryptonite in Sight

  • It's a bird! It's a plane! It's Supermarket!

Faster than a speeding bullet! More powerful than a locomotive! Able to leap tall buildings in a single bound! --"Adventures of Superman"

The question market players face this week is do they try to jump on a speeding locomotive? If your timing is off, it can be quite dangerous. But speeding locomotives don't stop quickly, so they chances of catching a ride are pretty good.

The dilemma is that by almost all measures the market is extended and in need of a rest. But there is no Kryptonite to slow this market down.

Fundamentally, the economic news has not been very good lately but that has been ignored, earnings season has been so-so, although there have been a few standouts like Google (GOOG) and LinkedIn (LNKD). Of course, you could have made the same bearish arguments for weeks and it wouldn't have mattered. The market continues to surprise both bulls and bears, which is one of the big reasons it keeps on running.

The bull's primary argument is the only thing that matters is the liquidity created by central bankers. If you are worrying about anything else, you are worried about the wrong issues. As long as money is cheap and has no other place to go, there's no reason to be bearish because the news doesn't matter.

My view has been that we need to stick with the positive price action as long as it persists. The time to be bearish is when we have some selling and the bad news suddenly starts to matter. Trying to anticipate when this market will turn has been an absolute disaster. It is tough enough for a disciplined investor to stay invested as we become more extended and it is a train wreck for bears who keep trying to call a top.

My style of trading is to take partial profits into strength, which hasn't been that good of an idea in many cases since many stocks just keep on running. The S&P 500 is up 18 of the last 21 days. What is most remarkable is that there has been almost no weakness during that time. The market hasn't been down more than 1% even once, which is an amazing feat of one-way action.

The most difficult thing about this market is how little volatility there is to the downside. We just never seem to have any real bouts of selling. When we do have weakness, the dip buyers are so quick to jump in that it disappears in minutes.

The biggest challenge is simply putting money to work. If you wait for some pullbacks before you buy, you are still waiting. If you are looking for unextended charts, you aren't going to find any. You have to chase and be willing to buy stocks that are hitting highs. It is very tough approach for many market players but there is no other choice unless you want to sit on the sidelines and wait for the correction that never seems to come.

We have a mild start this morning but that has consistently led to strength later in the day. The market needs a rest but we know that already. Just because it seems like a reasonable idea doesn't mean it is going to happen.

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