Stress Under the Surface

 | Jul 17, 2014 | 4:12 PM EDT
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The market has been showing signs of stress under the surface for a while and it became more apparent today following news of a passenger plane going down in Ukraine. It is still unclear exactly what happened, but it is clear how messy things are internationally. The situation in Israel is also heating up and that isn't helping either.

As I've said, we have had warning signals lately with poor breadth, underperformance by small-caps and lack of vigor in momentum stocks. There have been small pockets of positive action in banks, chips and broadcasters, but the market has seen the list of negatives grow recently and the news headlines are now pushing in the wrong direction.

We have earnings reports to consider but the market seems uninterested. There isn't much of an inclination to chase momentum as we can see today from the action in Intel (INTC) and Microsoft (MSFT).

Most worrisome is that the action reminds me of March, when we saw a very ugly stealth correction. Many individual stocks are not acting right, although the senior indices haven't been hit much so far. Don't let the S&P 500 and Dow fool you. This market is much weaker than it looks.

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

July 17, 2014 | 1:22 PM EDT

Pop That Bubble Talk

  • The only bubble right now is talk about bubbles.

Bloomberg is reporting that, according to their survey, two out of three financial professionals believe the market is on the verge of a bubble or already in one. That is an amazingly high number and, from a contrarian standpoint, suggests that we aren't even close to a real bubble.

We've heard bubble talk for quite a while, but if you actually have participated in a bubble, you know that it is nothing like the bubble in tech stocks of 1999-2000 or the real estate bubble of 2005-2007. We have never had the euphoria that was generated during those periods. In fact, the attitude of many traders is downright negative as they chronically underperform. They constantly complain about the manipulated and artificial market. Many think the market is grossly extended, but it isn't because of the emotional reasons that you typically see. This is bubble isn't driven by human emotion. If it were, then why don't we have celebrations as folks roll up big gains?

I suspect that most of the folks who are calling this market a bubble are the very ones who have been underperforming for years. They are hoping that it is a bubble because it will have to pop, and when it does, that will allow them to finally produce relative performance and catch up with the indices. The folks who missed the ride are inclined to dismiss the market as irrational -- and what is more irrational than a bubble?

One day we'll have a big, ugly correction, but the more we hear about bubbles, the less likely I think it is going to occur right away. The only bubble we have right now is talk about bubbles.

The market is doing a good job of digesting the news of the downed jet in the Ukraine, but breadth is still better than 2-to-1 negative and we have continued underperformance by small-caps and momentum stocks. The indices are holding, but signs of a rotational correction continue to develop.

July 17, 2014 | 10:45 AM EDT

Speculative Energy Is Lacking

  • The weak action under the surface makes me nervous.

The dip buying is automatic on a gap-down open like this morning's. The market moved back up close to even, but breadth is poor, especially on the Nasdaq. Market players want to buy but aren't willing to be aggressive.

Small-caps continue to struggle. So far, the iShares Russell 2000 (IWM) is holding above its 200-day simple moving average but support looks precarious. Momentum names aren't doing much either. Google (GOOGL), which reports tonight, isn't attracting much interest and the hot money seems more interested in Microsoft (MSFT) and IBM (IBM) over Tesla (TSLA) and Apple (AAPL).

Once again, it isn't bad action, but it is lacking the sort of speculative energy you'd expect when the indices are trending up and making new all-time highs. It is strong enough action to keep the buyers interested but not good enough to make them create good momentum.

I've sold down my position in MSFT into the gap-up open on layoff news and have made a few other small moves. Chip stocks Tower Semiconductor (TSEM) and Spansion (CODE) remain on my radar, but I'm buying very incrementally and quickly taking gains when I have them.

The market continues to act OK but the weak action under the surface makes me nervous.

July 17, 2014 | 8:11 AM EDT

Indeed, This Is a Poor Trading Environment

  • Pay no mind to the headlines proclaiming otherwise.

To get what you want, stop doing what isn't working. --Earl Warren, former chief justice of the U.S. Supreme Court

Although the Dow industrials made a new all-time high on Wednesday, an increasingly narrow selection of names are currently working. There is an uptrend, but this is not a roaring bull market: Money is not pouring in, and there is no speculative frenzy.

Here's what is working: a handful of a few big cap names, such as Intel (INTC), Microsoft (MSFT), IBM (IBM) and Cisco (CSCO), and some broadcasting stocks due to the take-over speculation around Time Warner (TWX). While the buy-and-hold bulls continue to celebrate the never-ending broad uptrend, many traders are worried about signs of fatigue.

The biggest concern right now is that far too many stocks are not acting well. Even on Wednesday, after the good news from Intel, breadth on the Nasdaq was 1120 gainers to 1525 decliners. The iShares Russell 2000 Index (IWM) underperformed again, and it has now declined in seven of the last 10 trading days.

The poor performance isn't limited to small-caps, either. Big-cap momentum stocks have been moribund for a while. Names such as Tesla (TSLA) are struggling, and on Wednesday we saw intraday reversals in Apple (AAPL), GoPro (GPRO) and Google (GOOGL).

Given the lack of names that are working well, many market players are worried that a topping process is beginning to play out. The big fear is that we are starting to see a "stealth" correction, much like what we saw in the March-through-May period. Many in the business media never really recognized how hard many stocks were hit during this period -- instead, they seem to think that the Dow is the only thing that matters.

Of course, the market looks very different if you focus just on the Dow. That is fine if you're trading that index, but if you're focusing on individual stocks, the current environment is a very challenging one. The list of stocks making new highs has been steadily shrinking. On Wednesday there were only 182 -- which is quite surprising, given that the major indices are hovering at their highs.

During the last couple years, it has generally been a mistake to become too defensive when those sorts of warning signals have appeared under the surface. The market always seems to find its footing, and it appears to consistently punish the folks who begin to anticipate trouble. The indices always seem to find support and trap the bears just when it looks as if something negative is building.

In a market environment such as this, the best thing to do is to stay focused on individual stocks. If something isn't working, get rid of it. If the market action narrows, that will force you to raise more and more cash, and then you'll be in good shape if a correction starts to gain steam.

So, again, at the moment solid performance is being seen only in a few stodgy big-cap names and some potential take-over targets. Usually there are a few pockets of speculative action in small-caps, but right now there is very little. As far as sectors are concerned, there is some strength in banking and chipmakers -- but we're looking at pretty puny leadership overall.

The indices look OK, but the action underneath does not. Stay vigilant, be selective and be cognizant that many stocks are acting poorly. This is not a very good trading environment, and we need to acknowledge that fact, despite what the headlines in the press might say.

At the time of publication, Rev Shark was long MSFT.

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