Fighting Off the Doldrums

 | Jul 12, 2013 | 4:28 PM EDT
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The fact that it was a summer Friday helped contribute to the tepid market behavior much of the day, but it was a positive nonetheless that the indices made a late-day push.

Despite the slowness of the earlier action and slightly negative breadth, the hot money was busy chasing liquid, high-beta names such as Tesla (TSLA), Netflix (NFLX), Priceline (PCLN), LinkedIn (LNKD) and Pharmacyclics (PCYC). Money managers have been struggling to keep pace with the returns the indices have generated, so they trying to catch up by focusing on the faster-moving big-caps.

Another thing helping the market is that underinvested bulls are anxiously looking for entry points. The straight-up action over the last couple of weeks has resulted in a high level of idle cash on the sidelines. Although many of the folks who hold these funds don't like to chase, they are fearful that this market may never pull back, so they put money to work on minor weakness, which helps give strong underlying support.

Next week earnings season begins and we'll see if the focus shifts to individual stocks, but the bulls are feeling good after Ben Bernanke made it clear that he is going to be supportive for a long time to come. Why worry about earnings and guidance when you have the Fed and its printing press in your corner?

Have a great weekend. I'll see you on Monday.

July 12, 2013 | 10:29 AM EDT

  • Champing at the Bit

It is nice to see the market consolidate and digest recent gains this morning; however, it is obvious that dip-buyers are champing at the bit to put money to work.

These V-shaped moves are ideal for creating a supply of dip-buyers. The mentality of many fund managers is only to buy their favorite stocks on pullbacks. They want to lower their cost basis if they can; on the other hand, performance anxiety makes them more aggressive about putting money to work. The result is the dip-buyers jump in on very shallow pullbacks and the market holds up very well.

While the indices look extended by many measures, I don't expect any major downside in the near term. It is more likely that we work off the overbought conditions by trading flat for a little while. Those dip-buyers just aren't going to go away when they haven't even had a chance to fail.

My biggest problem is trying to find new entry points. On a slow summer Friday after a big move, the pockets of momentum tend to be in the more liquid names like Netflix (NFLX), Amazon (AMZN) and Chipotle (CMG). Small-caps are slow, although SunEdison (SUNE), which I mentioned recently, is doing a nice job of breaking out of a long base. Revolution Lighting (RVLT) is another small-cap I've talked about that is breaking out of consolidation.

July 12, 2013 | 8:01 AM EDT

Don't Focus on Timing

  • Momentum has a tendency to continue longer than we expect.

Success is achieved by developing our strengths, not by eliminating our weaknesses. --Marilyn Vos Savant

After the remarkable run we have had since June 24 should we have any doubts that the momentum can continue? The Nasdaq 100 has had 12 positive days in a row with the biggest gains and best volume coming yesterday. Is it too late to jump on board or is this run just gaining steam?

Few things in trading are more challenging than trying to figure out when a market with strong momentum is finally going to turn. In fact, it is so difficult to do that I advise that you don't even try to time a market like we have right now. What works is to simply accept the fact that we have a very strong trend and don't question it too much until there actually is some change in the price action. That is not that easy to do as individual stocks become extended and entry points become increasingly scarce, but as I've often written, momentum has a tendency to continue for longer than what may seem reasonable.

The market certainly could use some consolidation of recent gains, but keep in mind that when we are hitting new highs, we don't suddenly reverse and go straight back down. The folks on the sidelines are fearful that they will jump in and buy at the wrong time, but markets do not crash from the highs. They may pull back and base, but when we have a huge run like we just had there is tremendous underlying support. A straight up-move to new highs creates a large group of folks who have missed out on gains who now want to buy dips.

I write about the V-shaped moves quite often because they are a relatively new phenomena and show clearly how market dynamics have changed since central bankers have become the primary driving force. A few years ago there is no way any technician would have predicted that the market would go straight up to new highs after the breakdown on the Bernanke tapering press conference.  Human emotions just don't tend to act that way. They don't go from extremely negative to extremely positive without some sort of transition.

Transitioning from negative to positive just doesn't occur now. We just reverse completely without any thought about what had happened the day before. It is a function of central banker liquidity, high-frequency computerized trading and market players that reinforce a pattern that has occurred on a regular basis.

My best advice is to not focus too much on market timing right now. The great temptation is to keep on trying to call a top. After the run we have had, it seems logical to believe we are finally going to rest a bit but even if we do start to top out it is going to take a while before there is any significant downside.  You are better off staying focused on good stock picking rather than trying to make money by catching a market pullback.

Earnings season kicks off today with reports from JPMorgan Chase (JPM) and Wells Fargo (WFC). JPM looks like it has posted solid numbers, but it is seeing little reaction in the early going. Next week we have a slew of reports and I'm hopeful that the focus will shift to individual charts and away from the Fed for a while. But anyone who thinks the Fed is going to let this market go back down just needs to look at what happened over the past two weeks.

Columnist Conversations

I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
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