Maintain a Positive Mindset

 | Aug 01, 2014 | 4:28 PM EDT
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After the pounding the market took on Thursday, conditions were good for some sort of oversold bounce.  Not only was it the first day of a new month but the weaker-than-expected jobs report renewed hope that the Fed would be in no rush to raise rates. While the market did manage some slight positive action in the morning, the bulls were unable to generate any real energy and, at around 2-to-1 negative, breadth was extremely poor again.

The bulls are used to quick and easy recoveries after a scare like we had on Thursday but we are missing the most important ingredient of all: the belief that the Fed will be careful not to spook the market with talk about interest rate hikes. There is more and more talk lately that the Fed is behind the curve and that their accommodation won't last forever.

We are likely to see a better oversold bounce next week but many folks, including me, will be very surprised if the market manages another V-shaped recovery. There are a slew of negative catalysts out there and, with the slow trading we typically see in August, it isn't going to be easy to generate the sort of upside momentum that we have seen in the past.

I don't want to sound overly negative -- I find the action this week to be quite healthy as far as helping us develop a better trading environment.  Much of the market has been struggling for weeks, and the action this week helps to bring the senior indices into alignment and gets them closer to some good support. We need action like this periodically to reset the action and create the next group of leaders.

Respect the fact that the market is acting poorly right now but maintain a positive mindset and be optimistic that good trades are developing.  This is the normal cycle of activity and we should embrace it rather than fight it.

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

Aug.1, 2014 | 10:47 AM EDT

Looking for Names of Interest

  • But I'm not trusting this bounce too last for too long..

We are seeing a pretty routine oversold bounce in the early going  The fact that it's the first day of a new month with some new cash inflows is probably helping, but the main catalyst is that the jobs news was weak and that makes the market hopeful that the Fed will keep refilling the punch bowl. Sentiment, ISM and construction spending were mixed but it is mainly the miss in jobs that is the justification for some buying.

Quite often these bounces slowly gain strength as those on the sidelines start to worry that the market is going to start running back up without them. If the market holds above the early lows, that will start to entice more buyers. But if it breaches the opening levels, another wave of stops and selling will likely hit.

Market players have been well conditioned to play bounces so there is a bias to keep this going, but the lack of sustained momentum recently has been a change in market character and may prompt more flipping than we have seen in the past.

At this point, there is no reason to believe that this is another V-shaped recovery and I'm in no rush to add back longer exposure. My accounts are less than 20% long and are about 3% off highs so I feel well positioned right now. The key is to stay selective and wait for the opportunities to develop.

I made a small purchase of BioTelemetry (BEAT) this morning, which had a good earnings report. I also made a couple small sales. I'm looking for names of interest but I'm not trusting this bounce too last for too long.

Aug. 1, 2014 | 07:52 AM EDT

A Change Is as Good as a Rest

  • We have not had very healthy action for a while.

I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life. -- Steve Jobs

Just a short-lived pullback or the start of a much-anticipated correction? That is the question after the market was pounded on Thursday.

As Steve Jobs once noted, it isn't all bad to have periodic resets. It can free you up for new approaches and new opportunities, so we shouldn't be overly pessimistic about poor action. We need it periodically for a healthy market.

Much of the market, particularly small-caps, have been weak for a while, but the issues that have been plaguing many stocks came to the forefront yesterday. The pundits provided a number of reasons for the weakness, such as the Argentinian bond default, but the most likely issue is probably worries that the Fed stimulus is slowly coming to an end. 

The market didn't react much to the FOMC policy statement on Wednesday but it is obvious that the tapering off of bond buying is done a deal and that rates will eventually rise. There is still enough slack in the economy to prevent the Fed from moving too quickly, but it is inevitable as the business cycle slowly turns.

This morning's monthly jobs news is going to be particularly interesting as a catalyst. The concern of some market players is that a good report is going to raise fears even further that the Fed is on course for higher rates. While a poor report may lessen some interest rate fears, there is still concern that we really do need some real improvement soon, especially if the Fed is done adding new stimulus.

The tricky thing about this market is that we have grown used to fast recoveries. It has repeatedly been a mistake to be defensive as we so often will quickly turn around and go straight back up. Sustained downside momentum has been rare. We did see it back early in the year when the Dow had a couple -300 point days, but when it bottomed in February it was straight back up.

One thing that the optimists are pointing at is that many stocks have been correcting for a while. The major indices may have taken their first big hit in a while, but many stocks are already deep into a correction. This flurry of selling may be what we need to push them to washout levels and finally produce some decent underlying support.

In market action like this, prudent traders really have no choice but to stop out of weak positions and wait to see if the market finds support. You can always rebuy positions, but that is often the cause of great frustration when we have these sudden V-shaped recoveries and it is necessary to chase positions if you want back in.  That has probably been the cause of much of the underperformance by hedge funds in the last couple years.

Overnight earnings form Tesla (TSLA) and GoPro (GPRO) are seeing negative reactions and overseas markets are moving down in sympathy. The jobs news is going to give us a jiggle, but the bears have some momentum now and it is going to take some real effort from the bulls to regain traction.

Over the last few years, I've often thought it wasn't possible for the market to pull off another V-shape recovery. What I failed to appreciate was how powerful the Fed was in providing support. The Fed is not shifting its bias and that is going to change the way the market operates. But do market players still have sufficient faith that 0% rates will not end for a very long time.

While a correction like this can be quite painful, it also a cause for optimism as it will shake up the market and eventually give us better opportunities. Although the senior indices don't reflect it, we have not had very healthy action for a while.  Hopefully we are now purging some of the poison and we will see improvement as sentiment starts to shift.

Jobs news is at 8.30 am ET. Stay vigilant.

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