Just Winding Down

 | Aug 28, 2014 | 4:22 PM EDT
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Not only did we have the lightest volume of the year, the action was also lazy, sloppy and negatively biased. The good news is that it would have been easy to sell off more, but we continue to see very good underlying strength. The dip buyers stepped up at the open and held things up the rest of the day. They didn't generate any major momentum, but they didn't let things slip much either.

Light-volume action in front of a holiday tends to have a positive bias, but when things are as extended as they are now, there can be some surprises as we wind down before the long weekend. There are profits to protect, but no one seems worried about losing them to a quick selloff.

International headlines can be used as an excuse for more selling, but market players fell for that a number of times recently and have regretted it. The trading isn't easy, but there is still no reason to be overly negative.

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

Aug 28, 2014 | 1:04 PM EDT

No Quit in This Market

  • The buyers are slowly walking the market back up.

The indices are slightly red and breadth is running, but this market refuses to roll over. The bears had the chance to press after the weak open, but the buyers have been persistent and are slowly walking the market back up.

For many traders, including me, it is irritating that we don't have more downside action as that is what creates good trading opportunities. In this market everyone is looking to buy dips, which prevents those opportunities from ever really developing.

It is still quite slow and there is potential to be jerked around, but the underlying support is scaring away any bears who thought they might have opportunities as volume shrinks and conditions become more extended.

I've made a few small buys of names like Tower Semiconductor (TSEM), Synchrony Financial (SYF) and Mandalay Digital Group (MNDL), but the dilemma of this market is that the best entry points never seem to develop. It is nice to be holding stocks that never go down, but it is frustrating not to have an opportunity to buy more.

Aug 28, 2014 | 10:38 AM EDT

Watch the Opening Lows

  • That level will shake out the dip-buyers if this bounce fades.

Increased Russian action in Ukraine and some weak economic news out of Europe caused a gap down open, but the dip-buyers have been waiting for this and they are quickly taking the market off the lows. Breadth is still quite poor -- 1,500 gainers to 3,450 decliners -- but there is still plenty of support. The momentum money is busy with Twitter (TWTR) and Apple (AAPL), which continues to help the indices. However, there is pressure on many of the high-beta momentum names that have been leading recently.

As I have previously discussed, markets that are near their highs don't just suddenly collapse and go straight down. When we have action like we have seen during the last three weeks, there is a large supply of folks who have missed out and are looking to buy pullbacks. They provide very solid underlying support and don't go away until they are burned a few times. There are bears calling for a market top but if they are right, it isn't going to be a smooth ride to the downside.

I took a couple stops this morning but haven't done much selling so far. Names like bluebird bio (BLUE), ZELTIQ Aesthetics (ZLTQ), BioDelivery Sciences International (BDSI) and Sky-mobi (MOBI) are still acting fine. 

Keep an eye on the opening lows. That will be the level that will shake out the dip-buyers if this bounce fades. Many folks are looking for a reason to sell so they can take off for the weekend, but the fear of being left out is still driving the buyers.

Aug. 28, 2013 | 07:27 AM EDT

Playing It Tight

  • It's better to be safe than sorry.

Excess generally causes reaction, and produces a change in the opposite direction, whether it be in the seasons, or in individuals, or in governments. --Plato

Early indications are for a weak open Thursday morning. The market is extended on light volume, and we have a long weekend coming up, so some profit-taking wouldn't be too surprising. That said, all this brings up an important issue: How aggressively should you trade market volatility?

Prior to the Great Recession, traders would produce superior returns by moving in and out of the market as trends developed and then shifted. Savvy traders would ride the uptrends, and then move to cash or short when things shifted. This strategy is much more difficult than it sounds, but that is how good hedge funds and active traders would produce superior results.

Since the market bottom in March 2009, this sort of active trading has become much more difficult. The market has tended to reward those who have engaged in simple buy-and-hold methods. The reason for this is that the dips are quite shallow, and when we do see pullbacks, the recoveries from them are very swift.

For those who do try to actively time the market, the dilemma is that these folks are given precious little opportunity to reload their long positions if they sell into a pullback. One of the market's characteristics for quite a while now is that a great deal of bulls have been chronically underinvested. These folks are constantly struggling to find long exposure in a market that doesn't make entry points easy.

So far this year, the S&P 500 has experienced three pullbacks, and in all three cases the index came back in a straight line and never retested the lows. If you sold on the breakdowns and then didn't rush to reload on the dip, you were left standing on the sidelines.

What adds to the difficulty is that many market players are convinced that a much deeper correction is looming. They are quick to believe that this time the correction will be different, and that if they aren't highly defensive, it will be extremely costly.

So the question this morning is this: Should the early weakness push us to make some sales and have us prepared for a deeper correction? Or do we hold tight and stay confident that weakness will be short-lived?

When a market is at its highs, the dip buyers will typically provide good support at first, so it is often a mistake to be too bearish at the very first signs of weakness. However, if you trade momentum stocks, gains can disappear quite readily if you don't act quickly when things soften -- such as during the three dips that took place earlier this year, which were all very costly for many momentum traders. Those groups fell much more quickly and further than the broader market did, and the failure to keep tight stops resulted in the need to make up a lot of ground.

It isn't my style to call tops, and I'm not suggesting that we are looking at one now. But it is important to consider how much room you will give your long positions if they start to weaken. I gave back too much earlier this year, and my inclination now is to play tighter and to take the risk that I'll have to rebuy if the market keeps running higher.

Regardless of your approach, the thinness of the market in the next couple days is likely to complicate things. On Wednesday there was some subtle distribution in a number of stocks, and we have a weak open on the way. Make sure you have a plan in mind.

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