Talk, Talk, Talk

 | Aug 13, 2013 | 4:23 PM EDT
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We had another good example today of how strong markets tend to stay sticky to the upside. It looked poor this morning after the gap-up open quickly reversed, but comments from a Fed member about how tapering might not happen that soon brought in buyers and had markets running straight back up. That was followed by a tweet from Carl Icahn saying he took a large position in Apple (AAPL), which helped to keep the sentiment positive.

The bears continue to attack the market with a variety of fundamental arguments but that has been useless as they are incapable of accurately timing when their concerns might matter. This market isn't acting like it is worried about anything -- which is just another piece of ammunition for the bears, of course, who say things are too complacent.

While I would actually prefer that the bears get it right and we see some downside, there just isn't any reason to take a bearish position other than blind hope. The price action continues to be quite positive and it is obvious that we still have plenty of dip-buyers who aren't going away. All they needed was a couple of positive sentences from a Fed member and they couldn't buy fast enough.

The bears are convinced that a top is coming soon. Maybe they are right, but until there is some proof in the price action, it is just useless talk.

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

Aug 13, 2013 | 10:40 AM EDT

The Fed to the Rescue

  • Same as it ever was.

The tendency of this market has been to reverse strongly just when it looks like it's on the verge of gaining downside momentum. Any bear who presses shorts into weakness has been consistently squeezed.

The catalyst for the intraday turn was the same that always seems to bail us out, the Fed. This time it sent the message that we shouldn't worry about a tapering of bond buying in September, which has become the general understanding recently.

That is all the market needs to hear to trigger the buy programs and go straight back up. Breadth is still running negative but there has been great improvement in many of the momentum names that looked like they were going to be dumped as the morning weakness picked up steam. Instead underinvested bulls are trying to add back long exposure.

I'm feeling a bit jerked around as I let my hope for a bit of a correction make me a little more aggressively negative than I should have been. If the market closes well, I'll look to add back positions, but I want to see if the market might be becoming a bit too complacent about being continually backstopped by the Fed.

Aug 13, 2013 | 10:40 AM EDT

Err on the Sell Side

  • It's better than giving back gains.

We have a hard reverse of the gap-up open and the bears are growing hopeful that a turn may finally be developing. We have had a streak of negative Tuesdays, so this is a good day to press if they are going to do it.

What's worrisome is that the momentum names are being sold hard. Facebook (FB) is below its $38 IPO price again, and virtually all the big-cap tech names, with the exception of Apple (AAPL) and Baidu (BIDU), are red. A number of the speculative small-cap names are also being hit.

I've taken stops in stocks like FB and Noah Holdings (NOAH) and locked in gains in BioTelemetry (BEAT) and China Automotive (CAAS). My only new buy so far is another speculative China name I discussed recently, CleanTech (CLNT), which reports earnings in the next couple of days.

My game plan is to play defense and make sure I don't let anything slip too much. I'm also eyeing Sarepta (SRPT) for potential entry points, but I'm in no rush.

The market has done a good job of shrugging off this action in a day or two, so I'm not going to be too bearish. But I'll err on the side of selling rather than give back gains.

Aug 13, 2013 | 8:20 AM EDT

Crash Your Fears

  • And build a soft cushion of profits by not fighting this market.

And the things that we fear are a weapon to be held against us. --Ian Rush

The nature of trading is to constantly try to stay one-step ahead of the market. We want to be holding cash and shorts at the exact top, and be loaded up long at the moment we make a lasting low. That inclination isn't necessarily the best way to approach the market but it is human nature to anticipate what will happen next.

The problem with this approach is the opportunity cost. To be holding a high level of cash at the top you have to forego current opportunities. In a market like this that can mean weeks of gains as you keep anticipating when the big turn is going to come.

Even though it would appear to be more rational to stay with the market trend rather than trying to anticipate when it will end, many people rush into cash because of fear of the big one-day crash. They worry they will wake up one-more and the Dow will be down a thousand points and they will suddenly have huge losses in all their positions.

Crashes do occur, so it isn't a completely irrational fear, but they are rare and they almost never occur when the market is making new highs. It is always possible that there will be a 9/11 type event that will cause a major sell-off, but if there is no way to guard against such an event and we are better off not even worrying about it.

I've been hearing more talk lately about how the market could undergo a 1987-type crash. Pundits try to draw parallels to the conditions that existed then while others talk about how the advent of tapering by the Fed is going to be the catalyst that sends the market careening down.

While it is possible, the main thing to keep in mind about crash events like 1987 is that they have plenty of warning. The market was already down nearly 20% before the 22.6% loss on Oct. 19, 1987. If you had used simply trend following rules you would have been out of the market long before that event occurred.

More money has probably been lost worrying about a crash than has actually been lost in one. In my early days of trading, I often worried that I would wake up to a major disaster. While there were days when we had poor opens, I learned that overall I'd be much better off if I simply stayed with my trades until the market actually forced me to take stops and move into cash.

I bring this topic up because in the current market, it is so easy to keep looking for the top. I see several articles out there about 1987 crashes as sensationalist pundits seeking attention. The right thing, and the boring thing, to do is to stay with this market as long as possible and not dwell on the negatives that the pundits keep throwing at us. If you want to make a bearish case, it is very easy, but the price action tells us that is a mistake.

Stay with this market as long as you can and don't let fears of a crash scare you into sitting on the sidelines. When we do finally undergo a major correction, you will have plenty of time to reposition. Meanwhile, you can build a soft cushion of profits by not fighting this market.

I don't mean to imply that this is an easy market for bulls. It is slow and mixed, and a bit random, but you aren't going to make money on the short side now. Keep digging for trades and don't let fear of a crash distract you.

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