Another Day, Another Gain

 | Jul 09, 2013 | 4:30 PM EDT
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What is most notable about this market action is how consistently positive it has been for so long. It was yet another solid day of gains on light volume, but with good breadth. That has been the case just about every day for two weeks and it is definitely becoming tiresome, even if you are making money. Variety is the spice of life and we don't have much of it in this market.

The reflexive reaction to a market like this is to try to call a top. After all, it can't possibly run like this forever, so the odds of actually predicting a turning point must be going up. Maybe so, but that is what the top callers have been thinking for a while.

My advice has been to forget the timing and try to stay with the action as long as you can. If you feel that things are too extended, take profits but don't start loading up on shorts until there is actual price weakness.

The FOMC minutes are tomorrow and Ben Bernanke will speak, so there is likely to be talk again of tapering. The market has done a fine job of forgetting those worries, but if market players are looking for an excuse to do some selling, that might be it.

This is an extremely difficult market to navigate, but if we stay highly reactive, we'll be in good shape as things develop.

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

July 09, 2013 | 2:08 PM EDT

How to Make Money in This Market

  • Don't think.

What do you do if the market goes straight up for two weeks, like the PowerShares QQQ (QQQ), and you never put much money to work? Apparently, the answer is that you buy anyway. The anxiety of being left out outweighs the fear of buying too late. These days there never seems to be a point where people think the market is too extended.

The funny thing about this market is that the casual observer and the uninformed people in the media seem to think that it must be great for individual investors and traders. The reality is that the constant irrationality of the action has driven people away. They just don't understand why the market acts the way it does so they stand aside and wait for it to seem logical again. The fact that the action is so strong just feeds the frustration of the folks who refuse to embrace it.

I have to constantly remind myself that the way to make money in the market is to embrace the upside momentum regardless of the technical pattern or big-picture arguments. The market is back to where it was before the Ben Bernanke press conference two weeks ago that caused a panic in bonds and sent the market below key levels. We have completely shaken that action, even though it is even clearer now that tapering of bond buying and higher interest rates are likely.

If you want to make money in this market, don't think. Just respect the price action and ignore the bears regardless of how smart and logical they may sound.

July 09, 2013 | 10:28 AM EDT

Just Another Opportunity for Dip-Buyers

  • Not the start of a significant top.

The action is very choppy this morning following a third straight upside gap. Even though selling into strength has been a mistake for more than two weeks, we are seeing a little more of it this morning as many stocks, like Google (GOOG) and Tesla (TSLA), are off early highs. Breadth is still strong, especially on the NYSE, where it is 2:1 positive, but reversals are picking up and sell stops are being triggered.

I made one minor buy of YY Inc. (YY) on a recommendation and sold down a number of other positions. I don't have a whole lot of inventory as my style typically is to make partial sells into strength, and we have had plenty of that recently.

I have been looking for an opportunity to press index shorts but I still don't think the setup is very compelling. Yes, the market is extended and has overhead resistance, but the issue is that this sort of V-shaped action tends to create a big supply of underlying support. Buyers will jump in on minor weakness and typically won't back off until the action is bad enough to scare them a little.

So far, it looks like the reversal off the highs is just another buying opportunity for dip-buyers, not the start of a significant top. That can change, but I'm going to stay patient with index shorts.

July 09, 2013 | 8:28 AM EDT

Battling Boredom

  • A good shake-up would break up the monotony.

You need to let the little things that would ordinarily bore you suddenly thrill you. --Andy Warhol

The biggest challenge for traders is the lack of volatility. More one-way, V-shaped action on shrinking volume keeps the bulls happy, but it doesn't make for very interesting trading.

The best markets for trading are those with strong emotions on both sides that produce a constant tug of war. The bears have had so little success for so long that we never seem to have any good battles. The skeptics keep repeating the same arguments and the market ignores them. The bulls continue to walk the market slowly back up and anyone who fights it just looks foolish. The main driving force seems to be a bunch of underinvested bulls, like me, who take profits and are never able to keep enough money at work.

Another benign open is on the way. There is no major economic news and the important earnings reports don't start for another week. Alcoa (AA) is a non-event despite efforts by the media to make it interesting. Greece was saved again, which helps to boost Europe, but there are more downgrades than upgrades on the wires and nothing very interesting other than the blow-up of Intuitive Surgical (ISRG).

I have to admit to being frustrated with this market not because I'm bearish or bullish but because I want more action in either direction. These V-shaped moves are so challenging because they don't produce good opportunities on a technical basis. When a stock goes up five straight days on light volume, it isn't a great buying opportunity, and I probably don't have to point out how hard it is to short action like that in this market.

Long-term buy-and-hold investors love this action because it is so steady, but it undermines the advantages of active trading. Traders tend to prosper when there is good downside mixed with the rallies so that they can move in and out. The best-trading markets are those that don't go anywhere. This market has plenty of ups, which are great for taking profits, but no downs, which means that buys are almost always chases.

One of the biggest dangers of a market like this is that it is so tempting to try to call a top. Technically, it makes sense to anticipate some sort of pullback when it's gone straight up into resistance, but this market has consistently punished the bears, who keep trying to time a top. There is no advantage to building up big short positions when this market is trending upward. You are very likely to be buried in big losses by the time the market finally sees things your way.

I find the best approach for this sort of market is not to be dogmatically bullish or bearish but to focus on finding individual stocks to play on the long side. If you focus too much on the big-picture arguments, you are very likely to be misled, but if you focus on finding individual stocks that are attracting trading action, you can make money while all the genius pundits try to figure out the Fed, Europe, China, interest rates and all those other macro issues.

I'm battling boredom with this market and I would like to see a good shake, but the market has never cared about what I want so I'll just keep digging for good stock picks. My stock of the week, Renewable Energy Group (REGI), worked well yesterday and if we can find a few more like that, it will keep us entertained while the big picture develops.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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