Caught by Surprise

 | Jul 18, 2013 | 4:18 PM EDT
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Many market players were caught by surprise as the indices continued their relentless rise. Major earnings reports were mixed, Ben Bernanke had nothing new to say and the bears were more optimistic after the dip Tuesday, but the buyers just kept coming. It is the lack of bad news rather than a supply of good news that seems to be driving the action.

Breadth approached 2:1 positive and the financial sector led the way as interest rates perked up again. There was general all-around strength and not that many pockets of extremely strong momentum.

The buy-and-hold crowd loves the action but active traders and underinvested bulls are not having an easy time. The action is so lopsided that there is no way to get in unless you want to chase new highs and extended charts. That obviously can work well, but it is not a methodology that works for many money managers.

Google (GOOG) earnings are out and are a miss, primarily due to much higher-than-anticipated capital expenditures. Microsoft (MSFT) is also seeing pressure following what looks like a very poor report. The bears are going to seize on this news to call another market top, but markets at their highs seldom go straight down. At least we should have interesting volatility as we digest this news.

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

July 18, 2013 | 2:20 PM EDT

A Love-Hate Story

  • This lopsided market action produces odd emotions.

One of the most frustrating things about this market is that it favors inaction. It rewards buy-and-hold investing rather than active trading. Virtually all selling is premature. If you take profits with the intention of rebuying at lower prices, you never get the opportunity. If you try to call short-term tops, you have been punished.

The great benefit of trading is that it allows you to benefit from the normal ups and downs that occur in the market, but when they are no downs, you are not going to do as well as the investor who is fully long and stays that way. Traders need volatility, and there is virtually none in the current environment.

This lopsided market movement produces odd emotions. On one hand, there are bulls that are heavily long and loving the action because they just sit there and rack up gains. On the other hand, there are bulls that have made the mistake of taking profits and are greatly frustrated because they are unable to put cash back to work. There is a love-hate relationship with this action, which is great if you never sell, but not so great if you want to buy.

While the majority of the market continues to run higher, there's interesting weakness in the Nasdaq-100 as some big-cap technology names like Intel (INTC) and eBay (EBAY) struggle following their earnings reports. Financials are leading, and that favors the S&P 500 and the DJIA.

The big earnings report tonight from Google (GOOG) will be interesting. Analysts have been consistently moving target prices for the stock above $1,000 and expectations are high. This is probably one of the most important reports of earnings season, and the reaction to it will give us insight into whether this market will ever take a rest.

July 18, 2013 | 10:30 AM EDT

Bulls Keep Pushing

  • It feels like squeeze action.

Although the major earnings reports aren't impressive, the bulls keep pushing. The fear of being left behind offsets any worries about chasing an extended market. Of course, the smiling face of Ben Bernanke makes buyers feel safe and secure.

We have excellent breadth at much better than 2:1 positive, with banks and gold leading the charge. Chips are the laggard on Intel (INTC) earnings, and biotech is seeing a little profit-taking. Big-cap momentum names are mixed, with eBay (EBAY) hurting Amazon (AMZN) and some of the other Internet plays. Google (GOOG) reports tonight and there is probably a little nervousness because of the big run it has had recently.

It continues to be very challenging to put new money to work as the market continues to levitate on very light volume. It feels like squeeze action this morning as the anticipatory bears get caught trying to call a top again.

One buy I made this morning is Silicon Graphics International (SGI), which is trying to breakout through a triple top and has a target price of $22 from Needham. I'm going to keep looking for new buys, but I'm not expecting it to be easy as the air is becoming very thin up here.

July 18, 2013 | 8:23 AM EDT

Tepid Is the Market Temperature

  • The action is extremely dull for earnings season.

Energy and persistence conquer all things. --Benjamin Franklin

Despite another appearance by Ben Bernanke and some key earnings report, market action is very slow this morning. There isn't any bad news, but nothing particularly great either. With indices somewhat extended and the memory of Tuesday's little shakeout, buyers are standing aside and waiting for another dip-buying opportunity.

Earnings season hasn't yet offered anything interesting, with modest reports from SanDisk (SNDK) and Xilinx (XLNX) and mediocre ones from eBay (EBAY) and Intel (INTC). So far, there is nothing surprisingly good or bad. Google (GOOG) reports tonight and holds the potential for fireworks, but, so far, there is little market-moving news.

Ben Bernanke appears before Congress again this morning, but he has repeated the same speech three times recently and the market seems to have grasped his major point, which is that the Fed is in no big hurry to pull back its bond-buying program. They may taper if economic conditions show improvement, but they are still concerned about the pace of the recovery and anticipate the interest rates will stay low for a while.

The bond market seems to have finally accepted the dovishness of the Fed to some extent and yields have fallen, but bonds are still struggling as they anticipate that rates won't stay low forever, despite what the Fed may promise. Equities have done a great job of ignoring bond weakness but it is a potential headwind that will likely cause issues down the road.

Overall, the rather benign news environment played into the hands of the dip-buyers yesterday. They finally had their first real opportunity in quite a while to buy weakness and did a nice job of producing quick reversals. Tesla (TSLA) was a classic example of how dip-buyers act these days. The technical breach on Tuesday, which would normally send momentum players running for safety, enticed the dip-buyers, who nearly recovered all of the losses.

In this market, technical breaches of trend lines and support levels tend to be buying signals more than indications of caution. Just look at the breakdown in the indices in June. All the key indices took out important support, but that ended up being the time to buy rather than sell.

One of the biggest complaints of traders these days is that traditional technical analysis just doesn't work like it used to. The V-shaped moves and the buying after technical breakdowns are particularly good illustrations of that point. Rather than just complain about it, we need to recognize what is different and try to exploit it the best we can. One thing for sure is that you can't short V-shaped bounces and we had better think twice about shorting a technical breach like we saw in TSLA on Tuesday.

The indices are hanging near recent highs but momentum has slowed and conditions look a bit tired. We could really use more consolidation and churning to set things up and, with tepid earnings reports, that may be what we get.

Unfortunately for the bears, there is likely to be good underlying support as the dip-buyers hunger was not sated by the one-day opportunity on Tuesday. The bulls would love to buy more weakness, so even if we do pull back a bit, look for quick bounces.

It is as flat as a pancake and extremely dull for earnings season. Stay selective and protect your gains.

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