A Weak Finish

 | May 28, 2014 | 4:26 PM EDT
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A weak finish undermined an OK day of action, but it still was just a healthy day of rest after a good run. The mood had become a bit too frothy last night so it doesn't hurt to cool things off, but the slowness of the action and the weak close don't make the trading very easy.

If this market really has turned up we can afford a bit more rest but we need to hold support levels and then give the upside another go. We have the end of the month to help out, but my biggest fear is that we may not have enough energy to keep the momentum percolating. Disinterest is far more dangerous to trading than bearishness.

I'm hearing quite a bit of talk about how this market could keep on running and even melt up. Given the history of the action the last few years, it is very dangerous to bet against some sort of slow-and-steady ramp, but even if you are looking for it, finding the right vehicles is not going to be easy.

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

May 28, 2014 | 2:26 PM EDT

Support Kicks In

  • But it's still hard to put money to work.

The good news is that support has kicked in and there is some dip-buying. The bad news is that its slow going and breadth is still running negative. The S&P 500 is back to the highs of the day, but small-caps are lagging. Momentum stocks are acting a bit better with Facebook (FB), Apple (AAPL), Michael Kors (KORS) and even Twitter (TWTR) in the green.

The bulls view of the action is it's just minor consolidation after a good multi-day run, and it is hard to argue with that view. There are no signs of aggressive selling and it isn't looking like a failed bounce.

The big challenge of this sort of action is putting money to work. The buy-and-hold bulls scoff at those active traders who aren't always fully invested in this great market, but for the most part, it has been a good move to sit on the sidelines for the last couple of months. I suspect that many traders are ahead of the game by selling and staying patient.

I see a few possible additions later in the day, but the lack of strong momentum and the fact that there isn't that much leadership makes it challenging. I'm not too worried about having idle cash at this point, as things should develop if the market really has returned to health.

May 28, 2014 | 10:35 AM EDT

Raising Concerns

  • Selling pressure is steady, and dip buyers aren't being aggressive.

The market action over the past week or so has many bulls believing that the era of the V-shaped move isn't over, but the action this morning is raising a little concern. When we had frothy action like we saw yesterday, the buyers typically would be anxious to jump in quickly, and that would keep any pullbacks shallow. But this morning the selling pressure is steady, and the dip buyers don't seem to be very aggressive.

Breadth is running 1,850 to 3,350 negative, but more importantly, most of the momentum names that have bounced recently are in the red. Even Apple (AAPL) is showing signs of reversal after target raises this morning.

If the bottom is in and the uptrend has resumed, as Investor's Business Daily has stated, then we should find support levels fast. It actually would be healthy for some backing and filing rather than the V-shaped action, but it is likely to be unsettling to the bulls, who aren't used to much downside volatility when we start to run back up.

I was a net seller into strength yesterday and took a few more stops this morning. My cash levels are still high, and I'll be looking to put more money to work, but I want to see how much profit-taking occurs this morning.

May 28, 2014 | 8:23 AM EDT

The Hunt Resumes

  • Price action in momentum names is improving, and we can expect dips.

"You were sick, but now you're well again, and there's work to do."

-- Kurt Vonnegut

For the last couple of months, strength in conservative and defensive stocks has kept the S&P 500 and Dow Jones Industrial Average close to their highs. Many momentum names, technology stocks and small-caps have corrected deeply, but starting last week they began to turn up, and now the bulls are celebrating as the price action in their favorite names has continued to improve.

I mentioned yesterday that the bible of momentum investing, Investor's Business Daily, was maintaining the view that the market was in correction. After the close last night, it deemed that the Nasdaq had shown sufficient follow-through on higher volume to justify a change in rating to "confirmed uptrend."

That may seem rather late, as many stocks have already run up quite a bit from their lows, but during the last couple of years the market has proven to have more upside in similar circumstances. IBD and many momentum traders were often caught leaning the wrong way when we had a quick recovery, but if they avoided trying to call tops they typically did pretty well.

What is always challenging at this point in a turn is that many stocks have bounced enough to be a little extended and look ripe for a pullback. Take a look at Tesla Motors (TSLA), for example. It broke down on big volume on May 8 after its earnings report. Subsequently, it has been positive on 10 of the next 12 days and has managed to recover the 50-day simple moving average. Volume on the bounce has been quite light, and there is still some overhead resistance at the May and April highs.

In a momentum market, Tesla would normally be a "go-to" name, and it has been to some extent, but the entry here is technically difficult, as the stock has wedged higher and has little support other than 50-day moving average.

There are many other examples among momentum stocks such as Google (GOOG) and Facebook (FB), but there are a few leaders such as Apple (AAPL) that show the characteristics that are more typical of a strong trending market.

One thing that has really helped to change the mood over the past week has been the speculative action in small caps. It is still quite narrow, but the hot money has been gravitating to some small stocks that have made big move. Spherix (SPEX) from yesterday and NewLead Holdings (NEWL) from last week are good examples.

The big difference in the market this year is that we have had a much deeper correction, and there have been a number of failed bounces as it played out. We may now be ready for more V-ish action, but the precedent has been set for failed bounces, and there is likely to be a little more worry about that possibility now.

Probably the biggest negative right now is that the mood seems to be downright giddy as the bulls are greatly relieved that the ugliness of the last two months seems to have ended. I suspect though that many bulls are still very underinvested, and that is going to supply some good supply. One thing many bears overlooked last year was that the positive mood did not mean that bulls were heavily invested. There was always sufficient skepticism to keep us climbing the wall of worry.

The mood is good, there is cash on the sidelines, and that means dip-buying will likely come into play pretty quickly if we have some weakness. For now, it looks like the correction is over and the hunt for new buys is on.

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