Out on a Positive Note

 | May 23, 2014 | 4:10 PM EDT
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The market was in a holiday mood. Of course volume was very light, but stocks drifted higher all day and both speculative small-caps and big-cap momentum stocks performed well. Since a bout of selling action on Wednesday morning, we've had some V-shaped action that has helped to improve the mood. The bears will point out the anemic volume, but if you've paid attention the last few years that hasn't mattered once we started to bounce.

This action gives us an interesting setup for next week. The bears will be looking for a failed bounce just like we've had each of the last few weeks. And the bulls will be looking for the light-volume walk higher to continue. Many of the conditions that helped to drive the V-shaped bounces in the past no longer exist, so the bulls will have hard work, but we have positive seasonality at the end of the month before things tend to slow down again.

While the action is certainly better this week, there isn't much wild buying or heavy-duty momentum. Buyers are hesitant but a bit fearful that the market will keep on running up without them. I had a very hard time putting much money to work, although it was nice to see biotechnology, small-caps and big-caps like Facebook (FB), Tesla (TSLA) and Google (GOOGL) act much better.

The bulls have made progress this week but the setup for further upside isn't great. In the past that hasn't matter much, but this isn't the same market that we had last year.

The market is closed Monday in observance of Memorial Day. I'll see you back here Tuesday.

May 23, 2014 | 10:15 AM EDT

A Mishmash of Action

  • The action is likely to become choppy as folks head out early.

The early tone of trading is good as market players look for action, but I don't expect them to stick around for long, especially if we don't see the pockets of momentum expand. Biotechnology names PTC Therapeutics (PTCT), Prosensa Holding (RNA) and Sarepta Therapeutics (SRPT) are attracting attention, and Hewlett-Packard (HPQ) has reversed after the early release of its report yesterday. Otherwise, it is just a mishmash of action.

Momentum names aren't doing much, and there isn't much follow-through in the small-caps that were active yesterday. A few stocks, like Sky-mobi (MOBI), are still bouncing but it is very limited. I'm going to keep looking for something to do, but I don't see much. SRPT is one that I'd like to build but there is no big rush.

Don't force things, and keep in mind that the action is likely to become increasingly choppy as volume drops later in the day. Light volume can produce quick trades, but it can also cause surprise turns if you aren't careful.

May 23, 2014 | 8:18 AM EDT

Be Clear on Your Trading Approach

  • The danger of being caught in a failed bounce is high.

"What happens is not as important as how you react to what happens." --Ellen Glasgow

 The market saw some better action in small-cap stocks on Thursday, which increased hope that a shift in the action was developing. But there are still few reasons to believe that the correction has ended.

Market players have been exhibiting signs of hope as some of the stocks that have performed the worst over the last couple months are finally bouncing. There is, however, very limited conviction. Biotechnology, solar energy and some of the momentum names like Facebook (FB), Tesla (TSLA) and Google (GOOG) have been running up. But the big issue is whether it is just an oversold bounce within the context of a downtrend or the start of a major turn.

Market players are always quick to hope that a bounce means that there will be sustained upward movement. We have seen quite a few times recently, however, that the dangers of a failed bounce are quite high. Since February the Nasdaq has had six failed bounce attempts. While that may be enough disappointment to signal that we are washed out, the problem is that the most recent bounce has come on some of the lightest volume yet. That may be a function of the start of the slower summer season but it does not inspire much confidence.

At this point it is particularly important to be clear about your trading approach. Are you an anticipatory trader or a reaction trader? Traders who use a trend -following approach tend to be reactive. Rather than try to predict when the market turns, they wait for it to actually occur and then they try to catch a ride as the trend gains strength.

If you are a reactive trader there is still not enough evidence to believe that the market has shifted back into an uptrend. Anticipatory traders are champing at the bit and are quite hopeful that the bounce in small-caps and some of the momentum favorites is a sign that a shift is occurring. But the danger of being caught in another disappointing failed bounce is quite high.

The market tends to have a positive bias in front of a long weekend but it also is likely to see volume fall sharply as folks head out early. There are still plenty of issues to prevent deployment of substantial capital but there are some opportunities in individual stock picking which may help to keep things interesting.

At this juncture we need to continue to respect the fact that the market is in a downtrend. That doesn't mean we don't try some buys as the charts develop, but there continues to be little reason to load up onto long positions.

We have a slightly positive start and not much news flow. The potential for choppy trading is very high. 

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