A Slow-Motion Melt-Up

 | May 29, 2014 | 4:22 PM EDT
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The media is celebrating another record high for the S&P 500 but most traders don't seem too excited about the action. We've definitely have had much improved price action with Apple (AAPL) regaining its mantel as the momentum king, but stock-picking has been challenging due to reversals and rather tepid follow-through in many cases.

There seems to be a high level of frustration among many of the momentum bulls who are working hard to put more capital to work. The same dynamic occurred for most of 2013, which kept us pushing higher and higher on mediocre volume. The fear of being left behind and underperforming keeps these buyers pressing. Although they buy, they can't seem to produce much relative performance and that keeps them pursuing even more buys.

The most important think in a market like this is not to fight the trend. It might feel like we are extended and have poor technical support, but the buying support is out there and must be respected, although the action may be very slow.

The slow-motion melt-up is in full gear right now, and the fact that it causes quite a bit of frustration is what keeps it going.

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

May 29, 2014 | 1:35 PM EDT

Positive, but Slow, Trading

  • Not much chasing or momentum, either.

For a second straight day the market has done a good job of shaking off early profit-taking. Dip-buying interest is providing support but it is not nearly as aggressive as what saw many times in 2013. Market players are still looking for exposure and taking advantage of pullbacks, but they aren't doing much chasing or generating much momentum.

Breadth has improved to 3,200 gainers to 2,200 losers and we have the tandem of solar energy and biotechnology leading. Momentum stocks are generally holding up but there is choppiness, and we have reverses in Google (GOOGL) and Tesla (TSLA).

I have a few longs going, such as North Atlantic Drilling (NADL) and Zendesk (ZEN), but not much of significant size. We closed weak yesterday and I am not inclined to add much until I see how things look in the final hour. The tone of trading continues to be positive but slow.

May 29, 2014 | 10:33 AM EDT

The Flippers Are Active

  • So the potential for fast reversals is high.

Fear of being left out is driving some buying, but the action is choppy and you have to be selective. Most notably, momentum names like Apple (AAPL), Facebook (FB) and even SolarCity (SCTY) are being chased. Also, there is strong speculative action in "junk" names again, like Astrotech (ASTC), China Finance Online (JRJC) and InterCloud Systems (ICLD). There has been hot action in the low-priced stocks, and traders are trying to catch the next one that spikes.

Outside of a few momentum names at recent highs like AAPL and Vertex Energy (VTNR), most of the action is in bottom-fishing stocks like Twitter (TWTR) and SCTY. The danger is that these aren't value buyers for the most part; it is primarily traders looking for a quick flip, so the potential for fast reversals is high.

I'm doing very short-term trades in junk names and still don't see many places to aggressively deploy significant cash. The quick trades are fine, but the big money is made by catching trend moves with bigger size. After the run we've already had, it isn't easy to find new entries.

We are hitting the lows of the day and breadth has slipped into negative territory. Flippers are active, and that is putting pressure on things.

May 29, 2014 | 7:59 AM EDT

Back in an Uptrend

  • But leadership is weak and stock-picking difficult.

Plans are only good intentions unless they immediately degenerate into hard work.--Peter Drucker

With the senior indices hitting new highs and better price action in momentum, technology and small-cap names it is time to embrace the uptrend and forget the top calling. While the recent correction has been a very odd one, with the DJIA and S&P 500 hardly reflecting the underlying action, many stocks have shaken off their excesses and are now rebuilding their support.

In the nearly 20 years I've been trading I don't ever recall a correction that was as well-hidden as the one we have had over the last two months. Most of the business media never even acknowledged that there was some significant selling in a broad section of the market. They stayed focused on the indices that were being driven by a small group of defensive and conservative stocks.

One of the consequences of this stealth correction is that many fund managers are lagging the benchmark indices significantly. There was simply no way to keep pace with the S&P 500 or DJIA if you were holding growth stocks rather than defensive names.

Major funds also lagged significant in 2013 and that helped to create endless support for the market as managers constantly played catch-up. The only way for them to build up their relative performance was to buy dips aggressively and to increase their long exposure. The more the market ran up, the more money they had to put to work to keep pace. That is a big part of why we had so many V-shaped moves.

I don't want to sound overly bullish here as this is not an easy market. I've heard a great number of comments from traders lately that it may be better just to buy index ETF's rather than try to pick individual stocks. That's because it has become increasingly difficult to find the best vehicles.

Despite the better action in the market the last week or so, there still is not very clear leadership in momentum stocks. A few things have been walking up nicely like Facebook (FB), Google (GOOG and Tesla (TSLA), and so on, but their technical patterns are not the standard momentum leadership.

One interesting development has been a surge in speculative interest in 'junk' small-caps, particularly biotechnology. Traders have been shaking the bushes looking for low-priced stocks that are bouncing off the lows in the hope of catch a big move. It is very risky trading but there are enough of the plays that have worked lately to keep the traders trolling for more.

In summary, we have a market that is back in an uptrend but with mediocre leadership and a difficult environment for individual stock picking. There are pockets of momentum, but they are sparse and the overall low volume is making it more difficult.

The solution to dealing with this market is the same solution that so common in other areas. We just need to keep working at it. We need to dig for opportunities, manage traders closely and fight for every advantage. The fact that we have better price action is helpful, but it is up to us to execute and make some money now.

We have another mild open on the way and not a whole lot of news flow. It is likely to be slow going but there should be a few things of interest.

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