Cracks Appear

 | Aug 16, 2013 | 4:26 PM EDT
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The bears have been very early anticipating it, but this is the week the market finally saw a shift in price action to the negative. We haven't made much upside progress in a while but there was consistent underlying support holding and pockets of aggressive momentum.

Thursday, it finally cracked as a combination of poor retail sales, stronger-than-expected economic data, rising interest rates and fears of tapering were just too much for the bulls to ignore. There really weren't any new fundamental developments. The market just decided that the negatives the bears have been complaining about for months now matter.

The big question is how far does it fall as this plays out. The S&P 500 is already testing its 50-day simple moving average while the Dow has already breached it and the Nasdaq is still well above it due to strength in Apple (AAPL). There isn't much to suggest that we are finding support, especially since the rise in July come on low volume and with little consolidation along the way.

The bulls will be looking for another V-shaped move. At this point it's probably premature in large part because we are now in the midst of the dog days of summer and trading is likely to remain very slow until Labor Day. In addition, the Fed doesn't seem to be pushing back this time as interest rates move higher. In June, it made a full court press when the market started to worry about tapering and higher rates, but this time they seem less inclined to argue with the bond market over where rates are heading.

The bottom line is that the market has cracked and starting to downtrend. There is no reason to rush to anticipate a bottom. If we want to make money, we'll have to rely on more selective stock picking or, possibly, some shorts.

Have a great weekend and enjoy the waning days of summer. I'll see you on Monday.

Aug. 16, 2013 | 10:31 AM EDT

Can't Blame Dip-Buyers for Jumping In

  • Meanwhile, I'm putting together my watch list.

The dip-buyers are trying and put the market back in positive territory after a slightly soft open. It's premature for a good oversold bounce, but the market has come back quickly from severe selling so often you can't blame dip-buyers for being anxious to jump in. I'm sure many underinvested bulls are tired of missing out because they didn't move fast enough on a bounce.

I'm making a few adjustments to my holdings, but I'm basically where I want to be and in no hurry to buy more favorites. One I added after good news and positive analyst comments is Sarepta (SRPT), but that is because my position was already small and I want to rebuild it. I believe it will be a winner over time, but patience is required.

My focus is putting together a watch list of stocks to focus on as the downtrend develops or finds support. What works best is to stay cognizant of the big picture but stay focused on favorite names. I want to stalk entry points as the charts take shape.

Although the market is acting poorly, I am more optimistic because I see an increased supply of good trades setting up. A good market isn't one that goes straight up but offers plenty of trades.

I'll be posting my watch list this weekend and I would be interested in hearing your favorites as well.

Aug. 16, 2013 | 8:23 AM EDT

Bears Get Their Day in the Sun

  • Meanwhile, let's stalk good entry points.

Life is a series of natural and spontaneous changes. Don't resist them; that only creates sorrow. Let reality be reality. Let things flow naturally forward in whatever way they like. --Lao Tzu

My message recently has been to ignore the big-picture bears and stick with the trend until the price action shifts. Yesterday, the price action turned negative, which was the signal to lock in gains where you have them and tighten defenses.

Of course, the bears who have been fighting this market for hundreds of points are now celebrating their prescience. They told us it would happen and, indeed, it did. The fact that they are still sitting on big losses due to poor timing is just an irrelevance that they would like us to ignore.

We'll let the bears have their day in the sun while we focus on adjusting to the shift in market character. The bears have been helpful in setting forth a variety of reasons as to why the market is under pressure. Ultimately, it always boils down to the Fed and the issue this time is that interest rates are hitting their highest level in over a year and the Fed isn't pushing back. It's letting rates rise and are making it clear that the tapering of bond-buying is coming eventually.

The big question to consider is whether this is the start of a severe downtrend or just a hard shake of a market that had grown too complacent and overly confident that the Fed would stay market-friendly forever. "Don't fight the Fed" has worked better than any other advice in this market for a long time. Is the Fed's support of stocks finally ending?

I'm not going to try to predict what the Fed will do or how the market will react. What I know is that the price action has shifted and it is time to be cautious. The goal now is to protect gains and to be positioned so that further downside doesn't do too much damage.

The problem for the bears is that every time it looks like the market is starting to shift, it quickly reverses and goes straight back up. In late June, it looked like the collapse was coming with four straight days of heavy selling and key support levels broken, but a number of Fed members made comments about how they would stay accommodative and that created a massive squeeze that sent the market straight up for nearly five weeks. It was another classic V-shaped move, like so many we have seen in recent years.

If the pattern holds, we will have a bit more weakness and then rally straight back up. The straight up move will squeeze the bears and confound the underinvested bulls, but it will keep running as folks try to reposition.

I'm not predicting a V-shaped bounce but I'm definitely going to be watching for another to develop. The bears get the benefit of the doubt, and an oversold bounce will be suspect.

The good news is that this shake-up is going to give us new opportunities. Many stocks with strong fundamentals and good technicals are coming back to support levels and will provide good entries. The key is to prepare a shopping list and be ready to move quickly as favorites develop. I like to think of it as stalking for good entry points.

I'm not unhappy to see downside. It provides a better environment for aggressive traders who like to navigate downside volatility. This is where the traders can gain a significant edge over the buy-and-hold crowd that has done so well this year.

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