This Market Needs a Good, Hard Shake

 | Jul 16, 2013 | 4:15 PM EDT
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After three weeks of unrelenting positive action, the market finally suffered a small bout of profit-taking. In the bigger scheme of things, it was mild as the market barely gave back a single day of gains. But under the surface, there was aggressive selling of stocks that had been moving with strong momentum.

Tesla (TSLA) is probably the best example of a recent favorite that saw its momentum reverse today. Others, such as Google (GOOG), LinkedIn (LNKD), SolarCity (SCTY), YY Inc. (YY) and Gigamon (GIMO), didn't pullback as much but it was obvious that the hot money was pulling back.

Many traders, me included, may have seen losses today, but it was a relief to have a change in the action finally. It has been increasingly difficult to trade this market as it becomes more extended on thin volume. We haven't seen any volatility to provide better setups and entry points.

The question is whether this selling develops into a deeper correction. The market can afford to pull back quite a bit since it is so extended without suffering any real technical damage. In fact, it would be bullish if it shakes off recent complacency and restores skepticism and doubt.

The market went from panicking on worries about the Fed tapering its bond buying to euphoria on the reassurance it would keep rates low. Tomorrow, Ben Bernanke appears before Congress and we'll rehash the debate again. I suspect part of the selling today is due to nervousness that maybe Bernanke won't be quite as dovish when he speaks tomorrow.

This market needs a good, hard shake to get better trading, so I'm hoping for a little drama tomorrow. But keep in mind that legions of potential dip-buyers are frustrated by this one-way run and are likely to stay aggressive.

Have a good evening I'll see you tomorrow.


July 16, 2013 | 2:05 PM EDT     

Feels Worse Than It Looks

  • This selling is the best thing to happen to the market in a while.

The selling continues and it's the best thing that has happened to this market in a while. Straight-up action may look good to the media, but it doesn't create many opportunities. We need downside now and then to shake things up. The bulls have grown complacent, and we will have a healthier market if they have at least a few doubts about the market's ability to keep running up.

Barely two days of gains have been given back so it isn't much of a correction so far. However, since we haven't had any selling in so long, it may feel worse than it looks. Also, when the market first rolls over, the high momentum stocks tend to suffer most. People often forget that momentum cuts both ways. The stocks that go up fast tend to come down even faster.

I'm not doing any buying so far but I want to have a list ready so I can jump in quickly when there is a bounce. At the top of my list for a quick bounce trade will be Tesla (TSLA), but for now, I just want to re-establish a small tracking position, so I will be forced to keep an eye on it.

Most stocks are still extended, and even if they sink further, they will still be in technical uptrends. This selling may not feel too good if you are holding longs, but it is overdue and very healthy.

 July 16, 2013 | 10:30 AM EDT                             

A Little Ray of Sunshine

  • There's leadership in the solar group.

For the first time in nearly three weeks, there's actually some profit-taking. In a normal market it is hardly a blip, but this has been such a lopsided run that it is notable when there's a downtick that lasts longer than a few minutes. Before anyone becomes too concerned, there are already signs of dip buying. If anyone is nervous about the action, the underinvested bulls are wondering how quickly they need to act.

Breadth is slightly negative with leadership again from the solar energy group. Gold is bouncing, and oil and retail are laggards. A number of big-cap momentum names, such as Netflix (NFLX), Baidu (BIDU) and Amazon (AMZN), are still attracting the hot money.

While this little dip this morning is helpful, it remains very difficult to put new money to work. I'd love to add to positions in the solar stocks I've mentioned, such as Canadian Solar (CSIQ), JinkoSolar (JKS) and SunEdison (SUNE), but they aren't set up yet. One position I did add to this morning is LightInTheBox (LITB), but I'm trying to stay selective and not worry too much about having a high level of idle cash.

Long CSIQ, JKS, SUNE and LITB but positions will change at any time.

 July 16, 2013 | 8:45 AM EDT

Don't Question the Action

  • Embrace it.

All human errors are impatience, a premature breaking off of methodical procedure, an apparent fencing-in of what is apparently at issue. -- Franz Kafka

The market has been running straight up for weeks as the Fed has worked hard to reassure investors that interest rates would remain low. Does the momentum continue, or do things start to cool off as earnings season commences in earnest and Ben Bernanke appears before Congress?

We have had truly remarkable momentum in the market lately with the Nasdaq-100 in particular making a run of 14 straight positive days. We are in record-setting territory and there doesn't seem to be any reason that it can't continue. Central bankers are doing everything they can to bolster optimism, and they have done an exceptional job of it.

The easy thing to do in a market like this is to find reasons why it can't continue. The bears are going to tell us how fundamentals aren't that great, how economic growth is slowing and how real interest rates are rising. They have plenty of logical and astute arguments, but there is one big problem: The market just doesn't care right now.

The big question to grapple with is how do we navigate this action? Obviously, trying to anticipate when it will shift isn't working. Nothing has been more dangerous than trying to guess when the top will final occur. Not only do you rack up losses on anticipatory shorts, you miss gains on long positions.

The best approach has been to simply buy-and-hold, and to forego any contemplation of market-timing. If you have tried to trade, even with a long bias, you have likely cost yourself gains. There is no ebb and flow to the action, so the normal benefits of selling strength and reloading on pullbacks have not occurred.

The dilemma is that even the bulls recognize this sort of action can't continue forever, but profit-taking has been a mistake. Any effort to time the market has been unproductive, but it is human nature to keep trying to guess when the shift will come. My advice is to wait and react as conditions change. That is much easier said than done, but the best course of action is not to question the action but to embrace it.

We have earnings and Ben Bernanke in the next couple days to shake things up, but keep in mind that markets that act like this don't suddenly fall apart unless there is truly surprising news. We have very strong underlying support and plenty of folks would love to buy weakness. While further upside may not come easily, the potential for substantial downside in the near term is low.

It's extremely quiet this morning and there's little reaction to earnings so far. Just keep plugging away and ignore the market pundits trying to make the big, dramatic calls.

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