Logical Arguments Don't Matter

 | Jul 10, 2013 | 4:20 PM EDT
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The minutes of the last FOMC meeting did little to clarify the tapering issue, and the market action reflected that. We had a choppy day with the indices relatively flat. The underlying action had a positive bias, especially on the Nasdaq, where breadth was 1575 gainers to 1020 decliners.

Most notable today was the more than 400 new highs, which means market players are still willing to chase, even though it isn't quite overbought.

Ben Bernanke's speech may move the market, but what is remarkable is how this market has recovered after his remarks at a press conference. I don't think anyone could have predicted that it would go back up so far and so fast. There certainly was no technical or fundamental support for a V-shaped move with this much power, especially since interest rates remain elevated.

The great difficulty of this market is that logical arguments don't matter. All that matters is that stocks are staying strong and plenty of folks are disgusted that they are missing out. Momentum doesn't need justification to work; it just feeds on itself for longer than most people think is reasonable.

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

July 10, 2013 | 1:29 PM EDT

The Dreaded 'T' Word

  • There's concern about more selling if tapering comes up again.

The FOMC minutes generally don't have much market impact as they are old news, but today they are of more interest as the market looks for further insight into the tapering issue. After the negative reaction to Ben Bernanke's recent press conference, there has been a steady stream of comments by Fed members indicating that the Fed is still a long way from being less accommodative. The market has calmed down and rallied quite sharply, but there is obviously concern that we could see another bout of selling as the tapering issue is highlighted again.

In the "old" days (before the crash of 2008-09), we used to have "sell the news" reactions on a run-up into an important news event. But things have changed and that is a relatively rare phenomena. In fact, we often have the opposite reaction to anticipated news, and run up even more.

Technically, the market looks vulnerable to profit-taking, but this market has created a big supply of dip-buyers during the recent move and I'll be surprised if they don't provide quick support if a wave of selling hits.

In addition to the minutes, Ben Bernanke is giving a speech after the market closes today so there may be nervousness about that as well. Last time he spoke, he didn't say anything negative, but the market read between the lines and concluded that the Fed was ready to start tapering off its bond buying sooner rather than later.

Many market players, me included, have been surprised by how well this market has handled higher interest rates. I thought such a strong V-shaped move couldn't be pulled off with rates moving higher so quickly. The bears thought that rates would be what put a top in this market, but they have been dead wrong.

The market is not in a great position for more upside as it is already quite extended, but as we all know, extended markets can become more extended -- and that has been the pattern lately.

July 10, 2013 | 10:52 AM EDT

On Hold for the Fed

  • Maybe now is a good time to lock in gains.

Breadth is slightly negative and it is slow going in the market as minor profit-taking kicks in. The thinking seems to be that the Fed minutes or Ben Bernanke may spook the market again with taper talk, so maybe now is a good time to lock in gains after a big lopsided move. Of course, selling into strength has probably caused more regrets than anything else in this market, but it is hard to resist what seems like common sense.

I don't have much new going on. I've been complaining about the lack of entry points and conditions certainly haven't pulled back enough to change that. There are still stocks I've mentioned that are doing quite well, like CardioNet (BEAT), Renewable Energy (REGI) and Sarepta (SRPT), but I'm more focused on protecting gains than adding to positions. If we weren't so extended on lousy volume, I'd like to buy a few things, but the overall market is sapping my confidence. In fact, I'm inclined to take the ProShares UltraShort Russell 2000 (TWM).

My advice lately has been to wait for weakness if you want to sell or short, and we finally have a little this morning. But it always comes back to what the Fed has to say, and the market always seems to find the positive spin sooner or later.

July 10, 2013 | 7:51 AM EDT

No Easy Entry Points

These days it is an express-elevator ride.

The market's attempted rally so far has not had a price and volume surge big enough to produce a follow-through rally confirmation. -- Investor's Business Daily

While the market's recovery since the Bernanke tapering press conference is quite remarkable, what is even more remarkable is the manner in which it occurred. We simply go straight back up with barely any pauses or consolidation.

I have discussed the V-shaped bounce phenomena extensively because it is a major change in the way the market moves and presents the single biggest challenge to traders. Even if you are fully cognizant of this market tendency, it is still not easy to embrace.

A good example of how the V-shaped action catches market players by surprise comes from Investor's Business Daily, which is considered by many to be the bible of momentum investing. IBD proclaimed that the market was "in correction" after the breakdown on the Bernanke tapering press conference.  That was a pretty obvious call as the indices broke key support on big volume.  But what is surprising is that IBD still holds the view that the market is in correction. Despite the huge move over the last two weeks we never had the sort of technical action that would support a more bullish outlook.

IBD's market timing system is mechanical and doesn't always work that well, but it is a good example of how this market action has been so challenging. There simply aren't any easy or obvious entry points when we run straight up on light volume. Markets used to back-and-fill and consolidated as they stair-stepped higher. These days it is an express-elevator ride that doesn't allow anyone to jump on very easily.

The perverse nature of the action actually feeds on itself and makes it even more perverse. The more the market runs up the more frustrated the bulls with money on the sidelines become and the more likely they are to do some buying because they are so tired of being left behind. Essentially it is climb-the-wall-of-worry action, but rather than worry about fundamental factors the main worry is that the technical pattern will continue to be so extreme to the upside.

As far as the bears go, this market is destroying them once again. Some people just can't help but try to call market tops, but they don't seem to understand that the market just doesn't act like it did prior to the crash of 2008-9. The game has changed and anticipatory bears don't seem to be able to adjust their timing. In my view, if you want to short you'd be much better off to be late than early since the early bears are so far underwater that they won't break even until there is a massive reversal.

The point here is that we have a new normal in the way the market acts. Like many others, I don't like it very much, but we have no choice but to embrace it and try to trade it the best we can. Simply being aware of it is a good way to start.

We have some slight softness in the early going as market players anticipate some more Fed talk about tapering. We have the Fed minutes this afternoon, which will provide some insight into the varying views on tapering and then Ben Bernanke is giving a speech this afternoon shortly after the market closes.  While the speech deals with the history of the Fed, there is a question-and-answer session afterwards that could elicit a market-moving comment.

We are technically extended, but in the world of V-shaped moves that doesn't matter all the much. A little rest would be healthy, but this market seldom seems to care about doing what is technically healthy.

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