The Downtrend Gains Steam

 | Aug 19, 2013 | 5:24 PM EDT
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We had classic bear market action today as an early bounce sucked in buyers who were looking for a quick turn up. We topped out after the first 30 minutes of trading, trended down the rest of the day and closed near the lows. That is typical behavior as a downtrend gains steam.

Apple (AAPL), due to its heavy weighting in the indices, covered up some of the weakness, but by the end of the day, breadth was quite poor, with just 1,350 gainers to 4,200 decliners. All major sectors were in the red, though drugs and few commodity related groups showing some relative strength.

We had some strength in big-cap momentum names but much of it faded as the day progressed. Market players are used to sustained momentum, so they are willing to chase strength, but that didn't work very well today.

The problem right now is that we have little news flow, and interest rates continue to work their way higher. No one seems to believe that the Fed is going to ride to the rescue like it did back in June when we sold off in a similar fashion on the same worries. The Fed trapped the bears back then as they really started to press, but so far there don't seem to be any indications that the central bank will do it again.

In a market like this, your main job is to protect capital and not worry about rushing into new buys. The buys will eventually set up, but it is best to avoid the bottom-calling game. Trying to time the top sure didn't work well this year, but you can bet that the same folks are now going to try to call a low. Ignore them and stay defensive until the price action improves.

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

August 19, 2013 | 3:09 PM EDT

Speculative Action Arises

  • Could it be a case of 'don't short a dull market'?

Although the indices aren't doing much today, we have quite a bit of speculative action in momentum names.

China names like Qihoo 360 (QIHU), YY (YY) and (BIDU), that have cooled off lately are active again. Also some of the go-to momentum names like Facebook (FB), Tesla (TSLA) and Google (GOOG) are acting quite well.

The issue is whether this is just bored traders and computer programs running a few things up or is early signs of yet another V-shaped bounce. We have two more weeks of slow summer trading with little news flow, but could it be a case of "don't short a dull market?"

While there are some things I'd like to reload, like FB and BioTelemetry (BEAT), I'm not feeling very confident that we will see sustained momentum in the near term. My plan is to maintain smaller positions and not hurry to add at this point. I don't believe this correction is over yet and I think we'll see some better entry points develop. 

It is very easy to be impatient and try to force some action on a day like this. The momentum action in stocks like Apple (AAPL) and GOOG give the impression that the market is health but in the bigger scheme of things we still have issues.

August 19, 2013 | 10:19 AM EDT

Momentum Leaders Start Strong

  • Dip-buyers are scooping up some market favorites.

The dip-buyers are ignoring the continued rise in bond yields and are buying some of the big-cap momentum favorites to start the week. Apple (AAPL) is acting like it did in the "old" days, and names such as Google (GOOG), Tesla Motors (TSLA), LinkedIn (LNKD), Chipotle Mexican Grill (CMG) and Netflix (NFLX) are attracting hot money.

Buying on Monday morning used to be amateur hour, but in the new world with the Fed in charge, it has worked more often than not. Nonetheless, you have to wonder if the upside pressure on interest rates may help to trigger a bull trap this time. Of course, looking for a failed bounce has been deadly, and since sentiment is pretty gloomy, it doesn't take much to squeeze the bears these days.

My stock of the week, NQ Mobile (NQ), is off to a good start, and quite a few of the small-caps are seeing support. The longer we hold up, the better the chances we don't roll over.  

Aug. 19, 2013 | 9:14 AM EDT

Sizing Up This Pullback

  • Is it the real deal?

"Deep summer is when laziness finds respectability."-- Sam Keen

Is the market undergoing a routine pullback, or is this the start of a deeper correction? That is the question we grapple with as the week starts. But what makes it particularly challenging is that it is the slowest time of the year as market players take last-minute summer vacations before school starts.

Late August always sees a decline in volume, but it did pick up sharply Thursday and Friday as selling took hold. Market players are growing increasingly concerned about higher interest rates, and the Federal Reserve's future tapering-off of bond purchases. The market managed to shrug off that latter worry in June, thanks to a barrage of comments from Fed members about how they would remain "accommodative." However, by now we're seeing little push-back as rates hit their highest levels in two years due to stronger-than-expected economic news.

For years now, the bears have been anticipating that higher rates would eventually be a substantial headwind for the market. The bulls have been shrugging it off with the rationale that the market can handle higher rates as the economy actually improves. The bears have responded that things really aren't improving that much -- and, in fact, that the worry should be about the potential for inflation to pick up even though growth is still slow.

That's what is weighing on the market now, and the big question is whether it will be saved once again by Fed promises of continued low rates. There is little question that tapering is likely to start before the end of the year, but that won't mark the end of the Fed-supported market liquidity. In fact, some have noted that it is premature to expect the central bank to do much, given the likelihood of another forthcoming budget battle in Congress.

If you are a momentum trader who rode this market up during July, there is little choice but to cut positions and take a defensive posture. The market is in correction mode, and that means tight stops and little buying until the action improves.

As I noted in my column this weekend, it is a great time to work on shopping lists and to identify those stocks you want to own when the market improves. We haven't had many chances this year to take advantage of pullbacks, so it actually is quite refreshing to have a good shakeup for a change.

The bulls are going to be watching very carefully for another V-shaped bounce. That has been the strong tendency for the last few years, but the question is whether the shift in interest rates will change that dynamic. Low rates and a friendly Fed have always provided support before, but we are starting to lose those conditions, and that may make things much more challenging.

At this point, my approach is to respect the fact that the market is in a correction, and to refrain from any rush to buy. On the other hand, I want to be mentally prepared for another quick recovery, so I want to have a good list of stocks to track -- and to be ready to do some buying as they set up. At the same time, I'm not going to anticipate that happening again.

Let's find some good movers and make some money.

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