A Subtle Shift in Character

 | Aug 27, 2014 | 4:14 PM EDT
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Breadth was flat and the indices did little, but there was more aggressive profit-taking under the surface than we have seen in a while. Big-cap momentum names underperformed, as did small-caps and many speculative China names. It wasn't a major change in character, but there were subtle shifts.

Of course, after the run we've had, some profit-taking is to be expected. In fact, many market players have been rooting for it in order to create new entry points. This market has been tricky lately, with good momentum but very extended charts on light volume. Many chases have worked but a fair number of reversals kicked in today.

The long weekend is beckoning and the action is only going to get slower, especially since there doesn't seem to be any major news. This atmosphere generally has a bullish bias, but the potential for quick swings is high. The market could use a rest and many market players are hoping it takes one so they can buy more.

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

Aug 27, 2014 | 1:31 PM EDT

Buyers Hang Tough

  • The underlying support remains quite impressive.

Although the market is extended and trading is thin, the best the bears could manage was very tepid profit taking. Breadth is running almost exactly even but there are a few pullbacks among the big-cap momentum names. Also, a number of the hot China names, including Autohome (ATHM), Leju Holdings (LEJU) and Bitauto (BITA), are finally pulling back.

The big positive is that the buyers aren't going away. They are still quite aggressive and there are big moves in Arista Networks (ANET), Mobileye (MBLY) and Bluebird Bio (BLUE). Apple (AAPL) is also helping the indices. The pockets of momentum are still there, but they have shifted a bit.

With the long weekend approaching and almost no recent profit taking, the potential for dips is high, but many bulls would welcome the opportunity to buy without chasing for a change. I'm going to fight the inclination to anticipate a turn and keep looking for things of interest to buy. The underlying support remains quite impressive.

Aug. 27, 2014 | 10:43 AM EDT

Eyes Peeled for Dip Buyers

The fear of being left behind remains palpable.

Some mild profit-taking is kicking in Wednesday morning, but it isn't aggressive enough yet to attract dip buyers. On Tuesday night at the close, there was a little frothiness as buyers chased things such as Twitter (TWTR), Facebook (FB) and Mobileye (MBLY). The fear of being left behind was palpable, and it may have been a minor blow-off.

This market has been going straight up for nearly three weeks, so some sort of profit-taking is not only unsurprising but quite healthy. It helps to have some resets now and then, and we can definitely use one after the low-volume rampage we've seen in many individual stocks.

I've sold down a few things this morning, and I'm keeping a close watch on my positions, but I'm still inclined to buy stocks with good-looking charts. I've been playing with LiveDeal (LIVE) this morning and have my eye on names such as Nimble Storage (NMBL), BioFuel Energy (BIOF), Arista Networks (ANET) and Zhaopin (ZPIN).

We'll see if the dip buyers make an appearance if some true softness takes hold. They have had so few chances lately that they are unlikely to be very patient. The prospect of being underinvested is a far bigger worry than that of getting caught in a turn.

Aug. 27, 2014 | 7:54 AM EDT

The Markets' Self-Fulfilling Prophecy

  • The V-shaped moves have become a repetitive pattern.

"There's an idea that hell is other people. My idea is that it might be repetition."

--Stephen King

Over the last three weeks the market has produced another classic V-shaped move back to all-time highs. The pattern has occurred with amazing consistency and seems to appear every time that market participants start to think that it can't possibly happen once again.

Typically, the view has been that the Fed is finally shifting and becoming more hawkish, which will change the ability of the market to fly back up in a straight line. While the logic seems sound, there just hasn't been sufficient catalysts for the pattern to shift. 

One of those days, the tendency toward V-shape moves will come to an end and we'll see a return to more normal ups and downs. But one of the keys to market success has been to stick with these V-shaped moves as long as you possibly can. They may not feel normal or even rational, but they work so well they are a self-fulfilling prophecy.

These V-shaped moves push many market players to try to guess when they will come to an end.  Many traders are overly anticipatory and end up being squeezed or underinvested, which pushes the uptrend trend to continue.

Typically, the V-shaped bounces don't lead to sudden reversals. Typically, the upside momentum will slow slightly, but because there are so many potential dip buyers we don't see any major downside. We stay quite sticky to the upside and only see pullbacks develop after a period of limited progress.  It takes a long time for the momentum to shift.

Many traders hate this sort of action because we don't have any normal ebb-and-flow. If you aren't long and don't stay long you have to constantly pay up in order to put money to work. The lopsidedness of the action has changed the nature of trading the last few years and many market players are still trying to adapt to something that seems unnatural.

We are seeing classic V-shaped action right now. But to complicate matters we are in one of the slowest times of the year. Light volume often makes conditions more volatile but in the present case that volatility has a very positive bias.

Most notably, right now market players are looking for action and have a hunger for speculative stocks. They are chasing things like Bitauto Holdings (BITA), Mobileye (MBLY) and Twitter (TWTR) and are beating the bushes looking for the next big mover. We often see this sort of mood during holiday periods. The waning days of summer seem to fit that description.

We have another positive open on the way and not much news flow once again. We are due for some sort of pause, but the bulls are still more worried about missing out than they are worried about being caught in a turn. 

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