A Decent First Step

 | Aug 04, 2014 | 4:19 PM EDT
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After the worst week in over two years for the DJIA the market was due for an oversold bounce. It started slowly as nervousness continued but found support at Friday's lows as the buyers started inching back in. It gained momentum late in the afternoon and managed the first positive-breadth day in eight sessions.

Most notable today was the good action in many momentum names with Priceline (PCLN) leading the charge. Others like Chipotle (CMG) and Tesla (TSLA) also attracted attention. We still only saw 52 new highs on the NYSE and Nasdaq combined, but there was good speculative action in momentum names and China stocks.

The big question now is whether this bounce means this little correction is ending. The bulls say, "Of course." The pattern of the market for so long has been to bounce and keep running, so it seems dangerous to even think something else is possible. But the risk of a failed bounce is higher now as we aren't seeing the same support from the Fed.

It always a relief to have better action after a battering like last week, but prior to the Fed and its endless cheap money the risk of a rollover and retest of lows would be quite high. The bulls still have work to do to prove themselves, but today was a decent first step.

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

Aug 04, 2014 | 1:47 PM EDT

Don't Start High-Fiving Yet

  • The market could still use more energy.

Although breadth is running negative for the seventh straight day, there's a little green in the senior indices. It isn't exactly a celebration of buying, but momentum names such as Priceline (PCLN), Google (GOOGL), Facebook (FB) and Tesla (TSLA) are acting well, which is the main thing helping the market.

In addition, China names such as Bitauto (BITA) and Tuniu (TOUR) are hitting new highs but the strength is narrow. There are only 39 new highs on the NYSE and Nasdaq combined while there are 143 new lows. What is most surprising about that is the indices are still so close to recent highs.

The biggest challenge is finding sustained momentum. The "chase" trade is only working a small percentage of the time and even then it's a crapshoot as to which ones will run. If you aren't highly selective -- and lucky -- it is very easy to get burned when things quickly reverse.

The bulls are still convinced that this market is going to come roaring back like it has so often, but slow seasonality and a less-dovish Fed will make that much more difficult. My feeling is that the Fed simply isn't going to provide the tailwind that it did for so long and is going to keep the upside progress far less vibrant than in the past.

Conditions are still oversold and there's room for more bounce, but we sure could use more energy. In the past, the bounces caused fear that underinvested bulls would be left behind. That doesn't seem to be the case now.

Aug 04, 2014 | 10:36 AM EDT

Losing Some Steam

  • There's a bit of hesitancy to embrace this market

There's a positive bias in the early going but there is bit of hesitancy to embrace this market, which is making for choppy and sloppy trading. Breadth has been improving and is now running 3,350 gainer to 1,800 decliners, and we have good strength in most sectors. Precious metals and oil lag while biotechnology, steel and homebuilders lead.

It is very tough to have much confidence in this action as it is very inconsistent. There are a few flyers like MobileEye (MBLY), but other stuff, like Tekmira Pharmaceuticals (TKMR) and Michael Kors (KORS), is turning down quickly. The most challenging aspect of the market in recent weeks is the lack of sustained momentum, although there are things that are holding up.

A few on my radar are Vasco Data Security (VDSI), Arista Networks (ANET), Bluebird Bio (BLUE) and IGI, Labs (IG). I added a position in BioCryst (BCRX), which has a cup with handle pattern, but this is exactly the sort of situation that hasn't seen continued momentum despite good technical patterns.

The market is losing steam as I write and I'm going to continue playing strong defense. It isn't terrible action, but it isn't giving us much to do on the long side.

Aug 04, 2014 | 7:37 AM EDT

End of the V-Shaped Bounce

  • The bulls have the burden of proof now.

The four most dangerous words in investing are "this time it's different," -- Sir John Templeton

Is it different this time? Will the market fail to produce another V-shaped bounce? Or is it different this time and the pattern will never change?  Markets always shift eventually and those who count too much on patterns are eventually surprised.

The major indices corrected more than 2% last week, which was some of the worst action since April. A number of international events, such as an Argentina bond default and a troubled Portuguese bank, were given some of the blame, but the primary catalyst was probably growing concern that the Fed was not going to keep interest rates at zero forever.

The single-biggest driving force in this market for years has been the very loose monetary policies of central banks. Cheap cash has offset one of the slowest economic recoveries in history and have rendered international events from Russia to the Middle East irrelevant. 

The problem is that market players are now starting to prepare for the day when the Fed will slowly begin to withdraw its cheap cash and start to raise interest rates.  Janet Yellen and her crew are being careful not to sound overly hawkish, but the slow shift is occurring and that is causing the character of the market action to shift.

The big question now is whether the recent corrective action is going to be shrugged off as quickly and easily as it has in the past. The best strategy for many years now has been to be confident that faith in the Fed would bring in the buyers and that all corrections would end quickly and completely.

The theme that has characterized the market for so long is the V-shaped bounce. Once we start to recover from a pullback, we do so without a pause. The normal back and forth that we used to see as the emotions of fear and greed playing out simply didn't occur. If you didn't embrace the market once it bounced, you were left behind. The underinvested bulls never seemed able to catch up.

Are things finally shifting? Are the days of quick and easy V-shaped bounces winding down as the Fed becomes more hawkish and starts to turn off the spigot of cheap cash? The bulls will certainly tell us that it is premature to worry about the Fed. Janet Yellen has made it clear that there isn't a big rush to raise rates, especially with the jobs market still struggling, but the market anticipates and it is starting to anticipate that something is going to change.

Unlike other pundits who claim to know the future, I don't try to predict. I let the price action be my guide. Right now we are under pressure, but we are oversold enough for some sort of bounce and the fact that it is Monday morning makes that more likely.

Do we look for another V-shaped bounce to develop? Market players have consistently been surprised by how the market is able to come back so quickly and easily after a correction, so we can't completely rule that out. Seasonality and the news flow would seem to make it less likely to occur, but we need to keep an open mind.

At this point my inclination is to maintain a slight bearish bias and to be ready for a failed bounce. The bulls have the burden of proof after last week, but the key is to be mentally ready in case they do have the capacity for another V-shaped move.

This market has issues, but it is due for a bounce and we need to be opportunistic even when the inclination of many is to look for a more severe correction.

There is plenty of green in the early going and a better tone, but it's Monday morning and it is tough to trust early strength for long. 

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