Trouble Under the Surface

 | May 30, 2014 | 4:25 PM EDT
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We wrap up the month of May with the sort of action that caused so much trouble in March and April. The major indices were in positive territory with mild gains, but under the surface there was some very poor action.

Breadth was negative: about 2,600 gainers to 3,000 losers. Small-caps, biotechnology and solar energy names were hit hard, but it was mainly the momentum names that acted poorly. Apple (AAPL), which has been one of the primarily leaders recently, reversed hard intraday, and many of the other key names that had been acting better lately did poorly. It may just be some end-of-the month profit-taking by traders that caught these stocks off recent lows, but it was the exact same sort of action that caused quite a bit of damage for two months, and it is a bit worrisome.

Overall, it was hardly a blip in the indices, and the uptrend that started this week is still in place, but we will have to monitor things closely next week to see if this "stealth" correction has the potential for a repeat.

Market players are pretty complacent, and that is a negative, but the biggest positive out there is fear of being left out of a better-acting market. We've been walking up steadily without much energy, and that type of action has a tendency to persist. There was some unpleasant action today but not enough to kill this market.

Have a great weekend. I'll see you on Monday.

May 30, 2014 | 10:10 AM EDT

Ignore the Pundits

  • How high the market might run doesn't make trading easier.

The tendency of the market this week has been slow starts and mild profit-taking followed by better action as the days progressed. The small-caps have been lagging recently, but momentum names have been better and buyers are interested in putting cash to work.

The pattern is playing out again this morning with a slow start and flipping, but there are underlying bids and breadth is just slightly negative. Momentum names are mixed, with Apple (AAPL) and Tesla (TSLA) taking the lead while Google (GOOGL) and the China Internet names lag. Chips and retail are up slightly but biotechnology is seeing profit-taking.

Most traders I talk with aren't bullish or bearish; they are opportunistic. They are looking for trades and are not paying attention to the endless yammering of the pundits. It is tough enough to find good opportunities, and dwelling on how high the market might run doesn't make it easier.

I see junk names LiveDeal (LIVE), NQ Mobile (NQ) and YOU On Demand (YOD) are active again, and I'm trying to do something a bit more substantial with Tarena International (TEDU), which has a very attractive chart and a recent target of $20 from Goldman Sachs. There is a bit of a disconnect in the action between the small-cap indices and the S&P 500, and that may keep things very narrow.

May 30, 2014 | 8:19 AM EDT

Don't Dwell on the Conditions

  • Simply accept the fact that the market is acting quite well.

Happiness can exist only in acceptance. -- George Orwell

The recent market action looks familiar. Just like in 2013, there is solid underlying support but, while we continue to trend upward, we are doing it without much energy.

The folks in the media are quite excited about the action, but the attitude among market players seems to be complacency and hesitant acceptance rather than wild bullishness.

In the days prior to the Great Recession, a market with the indices making new highs had a much different feel. Individual market players would be celebratory and there would be great excitement over the speculative action. While we have seen better speculative action recently, it isn't accompanied by this buoyant spirit that made the market seem so much more exciting in the old days.

For over five years now, many market players have been waiting for the second shoe to drop. They never believed that the recovery in the market was justified and they never believed that the rally would continue to this degree.  

These permabears, who have hated the market for so long, are now focused on how the gradual withdrawal of stimulus by the Fed is going to be the catalyst that finally ends this market's uptrend. Many of these bears have been looking for interest rates to rise for years now and have been killed, as they have tried to short vehicles like the iShares 20+ Year Treasury ETF (TLT).

Perhaps the Fed's tightening will ultimately produce the big correction that so many have been anticipating for so long, but at the moment it is of little consequence. The market is back on track and is producing a low-volume rally.

Probably the main reason that a new high in the S&P 500 doesn't generate more excitement is that many market players are still struggling to put money to work. Many disciplined traders have a hard time buying stocks that are extended on light volume and that is what we have in many cases. Facebook (FB), for example, has been up six days in a row now and eight of the last nine. On none of those days has volume been higher than the average volume over the last 50 days. It is a classic low-volume rally, but that is the sort of thing you have to buy in order to put money to work. 

The easy thing to do in this market is to complain about the action and cite all the good reasons while it can't continue. The hard thing is to embrace it and find ways to profit from it. Many of us have to work hard to set aside our skepticism. It is important to keep in mind that the market is quite different than it was five years ago. The way it moves and the stocks that perform best are quite different. If you haven't adapted to this environment, you are probably feeling very frustrated.

The best thing you can do right now is simply accept the fact that the market is acting quite well. That doesn't mean it is easy to find buys, but you have to keep working at it. If you just sit there and dwell on how conditions might change you will never do very well.

We have another quiet start, which has been a good omen lately. There is some economic news coming up and with a nice weekend beckoning things are likely to slow. 

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