Don't Hit 'Sell All' Just Yet

 | May 29, 2013 | 4:24 PM EDT
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For the fourth of the last five days, the bears had the edge. The dip-buying bulls tried to bounce after a poor open and downside action in the morning, but they were unable to take out the opening highs.

Breadth was quite poor, there was plenty of red on the screens and we didn't close particularly well; on the other hand, the action wasn't bad enough to do any major technical damage. The market is still above last week's lows and continues to look like routine profit-taking and consolidation after a big run. The bears have the edge but they aren't doing that much damage so far.

The big question is whether this is the start of a topping process that will eventually result in a downtrend or just overdue backing-and-filling action that will set up another leg higher.

The action is weak enough to play defense and tighten up stops, but plenty of stocks are still acting well and justify being held. I don't see a reason to hit the "sell all" button but there are stocks that shouldn't be given much room to the downside.

Keep in mind that it is the end of the month, which may result in window dressing pressure tomorrow, but the bulls are losing some of their resilience and we have to be very quick to react on lower lows. We are still in an uptrend but it is looking a bit shaky.

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

May 29, 2013 | 1:48 PM EDT

It's How You Finish

  • There's a correlation between market closes and market trends.

Bull markets tend to have strong closes. For much of the rally this year, intraday lows came early in the day and intraday highs near the close. Even last Thursday and Friday, when the indices were down, the market still managed to close near the highs of the day.

In bear markets, people fear holding stocks overnight so they tend to sell into the close. The market will open strong as the optimists buys early in the day but then sell off as worry and doubt set in.

It is often said that the "smart money" tends to act in the last hour of trading and the "dumb money" makes its moves in the first hour. The "smart" and "dumb" labels are questionable, but there does seem to be a correlation between the closes and market trends. When the late buyers no longer have an appetite for stocks, we must look for a change in the character of the market.

We have seen a few weaker finishes in the past week but we have yet to see a real flurry of selling as the day winds down. That will be a very clear sign to increase our defenses.

So far, this is a routine pullback. It is contained and healthy. It is what we need if stocks are going to continue to run higher. The bears are very anxious to proclaim that this is the beginning of the end of the uptrend, but there isn't enough evidence yet that we are in trouble.

We'll see how we close but, so far, there is still decent underlying support.

May 29, 2013 | 10:34 AM EDT

A Soft Start

  • The dip buyers are hesitating a bit so far.

We're seeing a soft start in the market this morning, and so far the dip buyers are hesitating a bit. For quote a while now, the pattern has been a slow start, followed by steadily gaining strength as the day progresses. If the market starts to uptick and take out the morning highs, that should encourage more buyers who are anticipating the pattern. 

One negative is that breadth is poor, at better than 2 to 1 negative -- but iShares Barclays 20+ Year Treasury Bond (TLT) has bounced and we're seeing leadership in gold. Recent hot groups, biotechnology and solar, are struggling a bit, as are retailers and home builders. 

Getting positioned for building downside momentum after a weak open has not worked for a very long time, so we'll have to watch carefully for that pattern to shift. Keep an eye on the intraday lows, which is where the sell stops will be set. 

I don't have much going on, other than trying to keep a tight leash on existing positions. I added to Halozyme Therapeutics (HALO), which is a favorite of Shark Biotechnology. I'm also watching Ambarella (AMBA), a recent stock of the week, for an addition. There isn't much upside momentum at the moment, so I'll bide my time.  

May 29, 2013 | 7:15 AM EDT

Watch for Free-Lunch Worries

  • The price action is becoming a bit more volatile.

"When things are perfect, that's when you need to worry most." -- Drew Barrymore

Although the market continues to hold up quite well, there have been some negative developments lately that warrant our attention. 

Last week we sold off three days in a row. We bounced back intraday and closed near the highs on Thursday and Friday, but it was a change in the nature of the action. Yesterday, we had a euphoric open and continued the streak of positive, but we sold off intraday and closed a bit weak.

Some weakness during an uptrend is a healthy thing. We need to consolidate gains and allow for stocks to rotate from weak hands to strong hands, but we have to watch carefully to see if topping action is occurring and the overall character of the market is shifting. So far, there isn't anything too worrisome about the action, but we need to be aware of the flaws and see if they start to expand.

If the market does start to put in a top, you can bet that the reason for it will be worries about the Fed tapering off its quantitative easing program. That continues to be the only thing that really matters to this market. Economic reports and other things are only important because they influence in the Fed.

What was most worrisome yesterday was the big drop in bonds. The iShares 20+ Year Treasury ETF (TLT) hit its lowest point since April 2012 and the reason given for that is that economic activity is improving. There still are few signs of the type of inflation that the Fed worries about, but the big issue out there is that the Fed won't continue its bond-buying program forever.

For years now the old adage "don't fight the Fed" has worked extremely well. The bears have tried to fight it with a variety of arguments such as "the economy stinks," but it hasn't mattered as the printing press continues to run and the cheap money pours out.

When the Fed finally slows things down it is going to have a profound effect. The Fed is well aware of that and it is going to lay the groundwork for it by hinting about how it will taper and making sure that it doesn't some as too big of a surprise.

What we need to do is to be keenly aware of when the market starts to embrace the idea that QE is going to be cut. When the market realizes that the free lunch we have enjoyed for so long actually has a price tag, the market is going to have a struggle.

I don't want to sound too bearish here, as this idea has been out there for a while and hasn't mattered at all so far. The Fed is not signaling that they are shifting quite yet, but the price action is becoming a bit more volatile and the uptrend is starting to falter. Increased vigilance is needed and we must be ready to act quickly if conditions deteriorate further.

Early indications are for a weak start as rumblings about higher interest rates and a less accommodative Fed are building.

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