The Momentum Is Reversing

 | Jun 05, 2013 | 4:18 PM EDT
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CNBC says that the selloff was due to a weaker than expected ISM number, but the number was actually better than expected. The real reason this market sold off is much more complex than a single data point, but that doesn't fit well into a headline.

What is troubling about this market is that momentum is reversing as worries grow that maybe the Fed may not be quite so accommodative down the road. This market has rallied primarily due to the liquidity created by central bankers and now there seems to be some recognition that won't last forever. Ironically, what would probably help the market the most is very weak economic data, which would push the Fed to make dovish comments about the future of its bond buying.

Regardless of the reasons, it's clear is that the price action is negative. Unlike prior pullbacks this year, there haven't been many signs of underlying support. The S&P 500 is hovering around its 50-day simple moving average and the April highs, but there is nervousness over the ability to hold those levels.

Another thing that has changed is we aren't seeing minor intraday bounces and the market is closing at the lows. The dip buyers have stepped completely aside and there isn't much appetite for catching falling knives.

By many measures, the market is oversold and there are plenty of willing buyers for a quick bounce but we are doing some damage, and even if it does bounce, it is hard to trust it to last long.

The market is acting poorly and that means we play defensively. The good news is that it will eventually lead to new and better opportunities, but we have to wait for them to develop.

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

June 05, 2013 | 1:54 AM EDT

A Shift in the Action

  • I'm not disappointed to see it.

It's always startling to see how quickly and completely market action can shift.  For weeks, it could barely go red before a swarm of dip buyers jumped in and pushed to new highs.  Today we have absolutely no support.  It is a fantastic dip-buying opportunity if you are a bull, but suddenly the idea of buying things that are in a free-fall doesn't seem like such a great idea.

We saw similar pullbacks in February and April that bounced as the market approached the 50-day simple moving average. This time it is a bit more overbought and has corrected a bit more, but this is the area the market found support previously.

It used to be that you would never expect a V-shaped bounce in a market that has pulled back like this, but that has become so common that I have to leave the option open.

The news flow, particularly worries about the Fed "tapering," seems to be a real concern, so I'm going to stay defensive. But I have sold my Direxion Daily Small Cap Bear 3X Shares (TZA) for now and I am looking for a little bounce and a remount at lower prices.

I've been rooting for a correction to shake things up and give us new opportunities, so I'm not disappointed to see this action. I have plenty of cash on hand and I'm optimistic about finding good setups in the near term.

June 05, 2013 | 10:42 AM EDT

Negativity Is Building

  • Think in terms of trades rather than long-term investments.

My theme lately is that the character of the market action has been shifting, which indicates that a top is forming. We have further confirmation this morning as dip buyers not only failed to take the market into positive territory but the opening lows were breached and there's downside traction. We have not seen that sort of action most of the year. It is a definite change in market character and we need to respect it and embrace it.

This sort of action tends to change behavior, which can lead to a reversal in momentum. Instead of buying dips, the thinking switches to selling strength. Missing out of upside as we trended higher was the big fear a few weeks ago. Now the fear of losing gains is becoming more prevalent.

I don't want to sound too negative as this sort of action often leads to very strong oversold bounces. Negativity is building and there are oversold indications. There are always folks who want to catch a bounce, so a little upside can lead to a spike quickly as the short-termers jump in for flips. Just make sure you think in terms of trades rather than long-term investments.

I'm having major technical problems this morning and not doing much. I cut back Ambarella (AMBA), a recent Stock of the Week, on a good earnings report and continue to take stops son some small positions. I also cut some Direxion Daily Small Cap Bear 3X Shares (TZA) but that may be premature.

June 05, 2013 | 7:34 AM EDT 

Fed Now the Main Issue

  • Nothing is more important to the market than that.

Fortune favors the prepared mind. --Louis Pasteur

Since November 2012, every time the market has been in a position like it is now, it has roared back and made a new high. Over and over the pattern is that just when it looks like we are going to crack some key support levels and fall into a downtrend the market will find its footing and turn back up.

What has saved the market each time is renewed confidence that the Fed will continue its quantitative easing program. The Fed seems to always be quick to signal that it will continue its bond buying, but this time Fed members are not being so helpful.

Last night two hawkish Fed members repeated their concerns about the Fed waiting too long to cut back its bond buying. There has been a steady flow of such comments lately, which is typically how the Fed will signal that a change is coming. While no one is expecting the Fed to do anything major right away, the talk about tapering the QE program is causing stress for market players who have done extremely well following the old saying about not fighting the Fed.

Wild volatility in Japan is also adding to the market instability. Japan is demonstrating that massive printing that drives down your currency does not guarantee that your market will go straight up forever. The central banks can only do so much and seeing what is going on in Japan has to make people nervous about how the Fed is going to eventually reverse its massive QE program.

So the big question for us this morning is whether concerns over the Fed are going to be the catalyst that finally pushes us into a downtrend. That really is the only thing that matters. The bulls are confident that the Fed will reassure us and we will regain our footing, but the bears are saying that this time it is different. The Fed is laying the groundwork for some tapering and the market is not going to like it.

There is no way for us to know what the Fed is going to do, but what we can do is react to the price action. The market has been struggling for nearly two weeks now and continues to flash warning signs. We haven't yet cracked some key support levels and there are still some decent pockets of momentum, but many small caps have broken down and the ranks of leadership are dwindling.

Some traders believe if you can still find some good acting longs then the market is fine, but the problem is that the tentacles of a weak market tend to suppress the momentum that does exist. It has been said that about 80% of stocks trade in the direction of the overall market trend, so your chances of success with longs is diminished as a downtrend emerges.

There is no reason to disregard the warning signs that are out there. It is far more important that you protect capital rather than try to catch another surprise bounce. You can always jump back in when the action improves, but you can't avoid losses if you just sit there and do nothing as the market struggles.

I would not be at all surprised to see another big bounce soon, but my position right now is that the character of the market has shifted and we are undergoing a topping process. I've been wrong about that previously this year, but this time it is the Fed that is the main issue and nothing is more important to the market than that.

We have quite a bit of data coming up this morning that should jerk us around. I suspect the bears may be more aggressive at fading strength this time and if I take some long trades I'll be looking to flip them fast.

Strap on your trading helmet and adjust your goggles. It is going to be bumpy.



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