A Market Without an Edge

 | Jul 28, 2014 | 4:24 PM EDT
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The indices came back from early lows and closed around even, but small-caps underperformed once again. The good news is that the indices are holding up, but the bad news is that there is very little upside momentum. A few big-caps are offsetting broad weakness in many smaller names. If you look at the Russell 2000 rather than the S&P 500, you will have a totally different impression of the health of the market.

The hardest thing about the market right now is that we are in the middle zone where there isn't enough weakness to support active shorting, but there isn't enough strength to make active buying comfortable. We are just dinking around with a small number of positive movers and a greater number of stocks that are doing nothing.

The best thing that could happen to the market is that we have a strong reaction to the Federal Open Market Committee interest rate announcement on Wednesday afternoon. We need something to shake things up and get us trending again in one direction of the other. Like many traders, I don't really care what direction we move, as long as there is a higher level of volatility and greater emotion.

It isn't a good market, but it really isn't that bad either. It is just uninteresting and edgeless.

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

July 28, 2014 | 1:24 PM ET

Here Are My Primary Longs

  • But I'm not very aggressive.

What has been most challenging about the market recently is that it is staying just strong enough to keep the bears at bay.

There is quite a bit of poor action in small-caps, biotechnology, semiconductors and some momentum names, but there are also pockets of strength in China-related names, some big-caps and merger plays. Breadth is solidly negative, especially in the Nasdaq, where it is more than 2-to-1 negative, but there are still some signs of underlying support. The dip buyers are losing some steam, but they are still out there to a degree.

Unfortunately, it isn't a particularly good environment for trading. The short side is working a little better, but the bears have learned over and over not to be too confident. A few things are working on the upside, primarily China, but there are quite a few quick fades and if you don't take profits fast you can be whipsawed.

My primarily longs right now are SunEdison (SUNE), BioFuel Energy (BIOF), VASCO Data Security (VDSI), Leju Holdings (LEJU), Tarena International (TEDU) and a few other odds and ends, but I'm not very aggressive. I did sell my Direxion Daily Small Cap 3x Bear ETF (TZA) position and will look for a remount, but I'm going to give the bounce buyers some room to show us what they have.

July 28, 2014 | 10:32 AM ET

The Zillow of China

  • It's my Stock of the Week.

The weak action from Friday continues this morning and so far the dip buyers aren't showing much interest.

There are a couple takeover deals grabbing the headlines and recent IPOs El Pollo Loco (LOCO) and GoPro (GPRO) have a bit of strength, but it's pretty poor action over all. 

China-related stocks are attracting some interest after strength in China overnight, but it is quite mixed. My Stock of the Week is China name Leju Holdings (LEJU), which is often referred to as the Zillow (Z) of China and is on the radar this morning.

The biggest problem with this market continues to be the weak action in small-caps and the narrow trading in momentum names. There are a few safe havens like Chipotle (CMG) and Baidu (BIDU), but the vast majority of small-caps have been poor for a while and continue to act poorly. Biotechnology in particular is being hit hard.

My review of charts this weekend was pretty dismal. There just wasn't much setup and I saw more potential shorts than longs. A high level of caution is warranted right now. The market looks like it is trying to rid itself of some of the poison that is hurting it, but it needs to take a bigger hit in order to deal with. 

July 28, 2014 | 8:02 AM ET

Waiting on the Fed

  • Will the decision be the catalyst that helps establish the next market trend?

Early next year, or potentially sooner depending on the pace of economic improvement, the FOMC may well begin to raise interest rates in gradual increments. -- Dallas Fed President Richard Fisher in the Wall Street Journal, July 27

The big question this week is whether the Fed interest rate decision at 2 p.m. ET on Wednesday will be the catalyst that helps establish the next market trend. 

We have been chopping around in mixed fashion for a while now and, while we are holding steady, we aren't making much progress either. The market has become quite narrow, with a handful of big caps like Chipotle (CMG), Under Armour (UA) and Apple (AAPL) holding up the indices, but the action in small-caps and quite a few momentum names has been poor. It is characterized as a grinding market by Helene Meisler, but it probably has a more negative bias than that.

As is usual, the bears are extremely frustrated that the market is ignoring all the geopolitical issues in Ukraine, Israel and Iraq. There may be a momentarily blip on some headlines, but for the most part the market simply hasn't cared about those matters.

The bears have also been flummoxed by the markets lack of concern over the potential for higher interest rates. We have had a few glimmers of better economic news and the Fed does seem to be on a steady course of reducing its bond buying, but there hasn't been any major worries yet that the declining Fed support is going to harm the market.

With interest rates still near zero, there isn't much reason to worry yet. But with folks like Richard Fisher sending signals of increased hawkishness, it is only a matter of time before the market is going to start to worry about tightening. The billion-dollar question is "when?"

Janet Yellen continued a very dovish tone in her recent Congressional testimony, although she did cause some problem with ill-advised comments about valuation of biotechnology and social media stocks. But she has been soothing to the market with comments about how there is no rush to raise rates.

While the potential is there for the Fed to be a negative market catalyst the bears have been incorrectly anticipating this for years. I don't know how many billions have been lost betting on a decline in the iShares 20+ Treasury (TLT), but the vast majority of it is because of the very simply logic that rates simply have to go up sooner or later as the economy improves and the Fed withdraws its accommodation. Maybe so, but it is all about timing and the market just hasn't worried about that issue very much so far.

The market has not been particularly easy to trade lately, so there are even some bulls that wouldn't mind seeing the market take a hit on the Fed news. A good hit would likely make for some better trading, but in the depths of summer, with light volume, it is going to be choppy no matter what.

Earnings season has generally been pretty good, although semiconductors really came apart last week. There has been some good big-cap action, but most of the key names have reported now and we start hearing from the secondary stocks now that don't have as much impact.

Don't forget we also have the July employment report on Friday that is going to be seen as another potential catalyst for a change in tone by the Fed.

Overall, it is a tough trading market right now, but the bears continue to have little success while the bulls constantly find support. We have the potential for the Fed to shake things up, but it is seldom that easy for the bears.

We have a mixed open setting up, Europe is doing little, but China performed well on better data once again. 

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