Head-Scratching Action

 | Jun 02, 2014 | 4:24 PM EDT
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While the folks on television celebrate the new all-time highs for the DJIA and S&P 500, market players are scratching their heads over why they have so many poorly acting stocks. Despite the positive finish for the indices, there were about 3,250 stocks down on the day vs. 2,400 that were up. Most of the lagging names were small-caps but there was plenty of mixed action in momentum stocks and some of the more speculative sectors. Defensive names like Johnson & Johnson (JNJ) and transports put in the best performances.

If you trade individual stocks it is a very tough tape, but if you simply hold the DJIA or S&P 500, it looks great. That is why there are such conflicting views of this market. The traders who are trying to make money by picking stocks are frustrated and annoyed, while the index holders think everything is peachy.

Typically, this sort of uncorrelated action bodes well for the overall market, but the bulls are scoffing at that thinking right now. It is hard to argue with them when the words "all-time high" keep popping up. It is hard to argue with indices that keep going up.

I'm in the frustrated-and-annoyed category, as individual stock picking just isn't yielding much. That is how it goes at times, but the strength in the senior indices makes it feel much worse. It may be a good market as far as headlines go, but the underlying action isn't much fun.

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

June 02, 2014 | 1:32 PM EDT

Random and Choppy Action

  • Many of the same stocks that began suffering in March are weak again.

The market action has been choppy and random lately, and it didn't help matters when the Institute for Supply Management numbers were incorrectly reported not once but twice. We rallied back when it turned out the number was higher than expected and then softened when it was revised to what was expected in the first place.

The random numbers gave traders something to do in the very short term, and the way it played out probably helped to stem the selling pressure today, but we still have plenty of poor action once again. What is troubling is that the same stocks that suffered starting back in March are acting weak again. Many of these stocks are still well off their highs and have poor technical patterns. The light volume doesn't help much either.

We will see if the bulls can regroup and bounce some of these stocks, particularly the momentum names, that have been rolling over, but a weak finish is likely to cause some concern. The bulls are still excited about the Dow Jones Industrial Average, but if you are stock-picker, you will probably have better luck on the short side right now.

Keep in mind that many of the folks who feel good about this market are invested in index vehicles. Someone who has his 401(k) allocated to "equities" doesn't much care about the underlying action that concerns the typical trader. As long as the S&P 500 is acting well, that is all that matters. Maybe the poor underlying action is a sign of problems down the road, but why worry at this point? There is no reason to sell your index until it actually does something wrong.

June 02, 2014 | 10:28 AM EDT

Grumbling Grows Louder

  • The indices fail to reflect the poor action under the surface.

The DJIA has reversed into negative territory, but there is plenty of grumbling about how the senior indices fail to reflect the extremely poor action under the surface.

Momentum names, biotechnology and small-caps are being hit very hard again. These groups acted poorly Friday and they are being dumped again this morning. What is worrisome is that these are the exact same groups that led to so much pain in March. They have bounced over the past couple of weeks, which shored up confidence and sucked in some buyers, but it is troubling to see many of them breaking down again.

The technical pattern of many of these stocks never improved that much, but market players have tended to believe in the low-volume, V-shaped move and that has made them more trusting. Selling into strength has not been quite as stupid as it felt during 2013.

As I noted in my opening post, I have found very few good charts, which is highly unusual in a market that is hitting new highs. The simple fact is that the indices just aren't reflective of what is going on. Ultimately, you always have to look to the action in individual stocks, and there is no way to escape the conclusion that they are not acting well.

I have very little going on. I had a few minor sell stops but, overall, my cash levels are already high and I see nothing I'm interested in buying aggressively. I see no reason to believe that stocks are going to start acting better suddenly.

June 02, 2014 | 7:59 AM EDT

No Quality Leaders

  • Leadership has been amazingly thin for a market with such healthy action in the major indices.

Every picture tells a story. But sometimes it's hard to know what story is actually being told. --Anastasia Hollings

We kick off June with the S&P 500 at an all-time high and some better price action in stocks that have corrected deeply over the past couple months. Traders are hopeful that the rally will gain momentum, but there are still some reasons for caution.

The biggest concern about this market is that there continues to be very little quality leadership. Momentum names such as Tesla (TSLA), Facebook (FB), Google (GOOGL) and Netflix (NFLX) have had good bounces, but they are still well off the highs from earlier this year. In a market where the S&P 500 is hitting new highs, there should be some strong momentum names as well. Probably the best momentum name recently has been Apple (AAPL), but you have to wonder how much of the speculation there is driven by the impending split.

We need more than just Apple to excite the aggressive momentum money. There is amazingly thin leadership for a market that has such healthy action in the senior indices.

Under the surface there has been a pickup in small-cap speculation, especially in very low-priced issues, but it looks a lot like overanxious traders trying to make something happen, mainly because they have had so little luck with other trades.

The market performed very well last week, but on Friday we had some troubling action in biotechnology, solar energy and momentum stocks. These are the groups that led the stealth correction that began in March, and it brought back some bad memories to see them act poorly again. It may have just been some end-of-the-week profit-taking after a good move, but many of the momentum and biotechnology names are forming potential head-and-shoulder tops after the recent bounce and need to be managed carefully.

I don't want to sound too negative, as one of the themes of the market for quite a while has been that there aren't that many great technical setups in individual stocks, even though the indices act well. If you are looking for the patterns that worked prior to the Great Recession, you aren't going to find much. Navigating this market has required a much different mind-set. Low-volume and V-shaped moves are the norm, and overhead resistance seems to have little impact.

The big positive out there is that there is much underperformance again. This market is tremendously difficult for many fund managers, and they are lagging their benchmarks again after a terrible performance in 2013. These folks typically look to produce big gains by buying pullbacks, so they help to provide support. When they are caught leaning the wrong way, however, they can accelerate the selling.

The start of the new month is typically positive, but we sure could use better action in individual stocks. My watch list is painfully thin, and that isn't going to change too quickly. Keep on plugging away and stay selective.

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