The Bears Stage a Comeback

 | Jun 04, 2013 | 4:21 PM EDT
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A late bounce took the sting out of the day but the bears still managed a minor victory. What was most notable today was that there was no follow-through from yesterday's bounce. The tendency of the market for quite a while has been V-shaped moves after a bounce like Monday's. Today opened positive but rolled over hard intraday before a bounce in the last hour.

Breadth was weak again but the major change in the market the past week has been increased volatility. There's more movement in both directions and many more intraday reversals. It is often said that increased volatility is an indication of uncertainty and a potential sign of a trend shift, but I'm not making that call.

What we need to make note of is that the nature of the action has changed. There are still a number of stocks acting fine but there are also many things breaking down. Leadership is narrower and there aren't many pockets of momentum left. You can always find a few that are being chased, but far fewer than a couple of weeks ago.

The market is still holding above key support levels but there are warning signs that require a higher level of caution. I've written that this past year we seem to find support and go straight back, up but what is different this time is that the issue weighing on the market is continuation of the Fed's QE program. There is nothing more important to the market than that, and if there are any doubts about the Fed's commitment, it is going to cause major problems.

We need to keep things tight while this volatility plays out. It may turn out to be just another bear trap, but that doesn't relieve the need to play it safe.

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

June 04, 2013 | 1:42 PM EDT

This Is Topping Action

  • Today's action demonstrates that something has changed.

I wrote yesterday that the market appears to be undergoing a change in character. Although we had a decent bounce in the indices, the underlying action and the mediocre breadth confirmed my view. The action today continues to demonstrate that something has changed.

During the first five months of 2013, the dip-buyers were resolute. They could hardly wait for the market to turn red before jumping in. The one-way action of the indices and the lack of consolidation assured that the supply of dip-buyers would remain high.

Over the past week, the dip-buyers have been losing their energy. When they do move the indices, like yesterday, leadership has been narrow and there is much rotation into more defensive names.

In my view, this is topping action. It doesn't mean the market will go straight down. In fact, there are likely to be upside spikes but we need to be mentally prepared for action that is more bearish.

The key to successful trading is to try to keep your accounts as close to their highs as possible so you don't have to make up losses. When the market begins to struggle, tighten your defenses and make sure you don't suffer too much damage. If the market regains its footing, you can always put money back to work.

This market has undergone a change over the past week and we need to respect that, the same way we respected the powerful momentum we enjoyed for most of the year.

June 04, 2013 | 10:28 AM EDT

Not Fading Away

  • Money is looking for places to go, and that creates trades.

Many market players are interested in fading the positive open but the market is holding up so far. Breadth is running stronger than yesterday, and there's leadership in bios, chips and regional banks while precious metals roll over again.

Some small-caps continue to struggle, which makes me wary, but the dip-buyers have been so well trained by this market to aggressively pursue weak bounces that it is hard to be negative. A lot of money is still out there looking for places to go, and that is creating trades.

I'm dinking around with a few small things like Perion Network (PERI) and InvenSense (INVN), but I am keeping things very tight.

I can't help but think that from a contrarian standpoint, it may be time to bet that the streak of positive Tuesday's may end. It is being taken for granted to such an extent that if the market goes red, the sellers may pile in. I have a little Direxion Daily Small Cap Bear 3X (TZA) position that I may add to if the opening lows are taken out.

June 04, 2013 | 7:52 AM EDT

Can the Tuesday Streak Continue?

  • I suspect this pattern is due to computer-driven trading.

Our strength is often composed of the weakness that we're damned if we're going to show. --Mignon McLaughlin

Bulls are breathing a sigh of relief after we kicked off the month of June with some positive action, but it was a very deceptive day.

The Dow was driven by jumps in laggards like Intel (INTC) and Coca-Cola (KO), while under the surface many of the momentum leaders like 3D Systems (DDD) and Tesla (TSLA) performed poorly. Breadth was just slightly positive and there was no shortage of small-caps breaching technical support.

Nonetheless, the action gave bulls the illusion of underlying support and now with market players contemplating the fact that we have had 20-straight positive Tuesdays, sentiment is feeling more upbeat. The market has so often been able to regain its composure after a brief bout of weakness it isn't surprising that the buyers are ready to attempt another V-shaped bounce.

The big question today is whether we can continue this streak of positive Tuesdays. Since 1900 there has never been a day of the week that has been so consistently positive for so long. I suspect that this phenomena is a reflection of how computer-driven the market has become. The folks who employ computer algos see this pattern and they program to exploit the tendency. They don't need to have any fundamental justification for the action. It is enough that it is a consistent pattern. They program to automatically buy (which may have caused the strong close on Monday) and then others dive in and another positive Tuesday is in the books.

At some point the pattern will fail and it will catch some folks by surprise, but sticking to patterns has been the right approach to this market for a very long time.

While yesterday's positive action seems to have stemmed some worry about the market, I did not like the action I saw in individual stocks. Many of the small-caps I follow performed poorly and it didn't see the sort of supportive action that had been so common so far this year. There was obviously some dip buying taking place, but it didn't feel as aggressive or as pervasive as it had been on prior pullbacks.

The single biggest mistake market players have made this year has been looking for downside momentum. There simply hasn't been any. We will have a few weak days and things look ready to crack, but then the buyers step up and we put together a V-shaped bounce back to new highs. It happened in late February and mid-April.

In both cases we had 3-4 weak days in close proximity, but then we have a weak bounce and keep on running up. Usually the central bankers and their endless liquidity are given the credit for the bounce and it is likely the bears add some short-squeeze fuel again.

This current weakness feels a bit different mainly because a big part of it is due to concerns that Fed may start to taper off its bond buying. That is the No. 1 market driver and if we start to lose that the great likelihood is that volatility is going to pick up.

What really helped the bulls yesterday was that we had a weak PMI report and that helped to ease some of the concern about a less-accommodative Fed. We are in one of those situations now where bad economic news is good because it means the Fed will keep on printing.

Ultimately, it is the action in individual stocks that determines the way I view the market and I was not very pleased with what I saw yesterday. The speculative stocks that had been working struggled, but that was masked by strength in the indices. If that continues today, it is a sign that broader weakness is on the horizon.

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