Stay Nimble

 | Sep 24, 2013 | 4:38 PM EDT
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The market has been doing a good job lately of catching traders by surprise. Yesterday morning the bulls were suddenly confronted with ugly action in the leading momentum names. This morning the "momo" train was back on track, but the action closed ugly and caught some chasers by surprise.

I suspect that this jerking around is mostly a function of computerized trading designed to play with the emotions of individual traders. Nonetheless, it is very choppy and it is easy to lean the wrong way.

What makes it particularly difficult is that the major indices don't seem to be adequately reflecting what is going on. The action in key leading stocks is totally uncorrelated to movement in the indices. If you look at the stocks I call the Four Horseman, they have little in common with the price action of the indices.

The poor close after the big early bounce is something we don't see often. It is a matter of concern because, typically, we'd have better support after a strong reversal like this morning's. Instead, the dip-buyers stood aside and let the flippers take the market down into the close.

There is probably some nervousness over the political battles, even though the market seemed oblivious this morning. The uncertainly of the debt-ceiling debate was a major problem at the end of last year and any headline about a lack of solutions is likely to generate a quick negative response.

Despite the poor action, there continues to be decent stock-picking but it is narrower and more treacherous. Stay nimble.

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

Sept. 24, 2013 | 1:25 PM EDT

Underinvested Bulls Have Their Day

  • An opportunity to really load up.

One of the major changes in the character of the market the last few years is how it seldom builds on downside momentum. We have seen poor action like yesterday morning, when it looked like all those things the bears have been warning us about are suddenly going to matter, but the next day it acts as if it doesn't have a worry in the world.

It can make you feel downright foolish when you start to think that maybe the market can't go straight up forever so you play some defense. The action yesterday morning was bad enough to scare some committed bulls, but now they are kicking themselves for even questioning the wisdom of buy-and-hold.

In the early afternoon, the action is looking good. Breadth is solidly positive, many of the small-caps that were hit the last few days are bouncing back and the pockets of momentum are feeling some heat. It reminds me of the motto from Mad Magazine, "What? Me worry?"

The more you contemplate this market, the more you realize the futility of trying to game the big picture. The macro simply hasn't mattered much. There are just too many folks trying to make a buck, and they don't care about the bearish arguments.

I'm managing my positions and regretting that I don't have my cash at work. What is at work is doing well, but the story of this market for so long has been the frustration of the underinvested bulls, who never seem to have an opportunity to really load up. They keep this market running and are doing a fine job today.

Sept. 24, 2013 | 8:04 AM EDT

Riding With the Four Horsemen

  • But what happens when the galloping stops?

The indices are struggling for a fourth straight session, but there is good action in the Four Horsemen, Facebook (FB), Tesla (TSLA), Netflix (NFLX) and LinkedIn (LNKD). I've been tracking this group very carefully as it is the best indicator of what is going to happen in momentum stocks. When traders stop chasing them, it will be an indication of bigger problems for the overall market.

Despite the strength in the momentum favorites, breadth is poor, especially on the NYSE, where it is closing in on two losers for every gainer. Small-caps, which led yesterday, are laggards today. Sector leadership is slack, but there are more than 100 new highs today.

The market is probably oversold enough for a bounce, and strength in the Four Horseman looks promising, but I'm playing things tight and I'm not inclined to build positions for the intermediate term.

I have added to a couple positions, but I've raised cash levels recently and plan on keeping liquidity. I added to a position in JinkoSolar (JKS) and NQ Mobile (NQ), and I took profits in Kandi Technologies (KNDI), which I discussed last week.

There are a number of things of interest but I'm going to take it slow.

Sept. 24, 2013 | 8:04 AM EDT

Petering Out

  • The market is losing momentum as it struggles with two key issues.

"Confident because of our caution" --Epictetus

The market is struggling with two issues right now, but it's still holding above key technical levels. The first issue of concern is the upcoming debt ceiling debate. Back last November and December, this same issue weighed on the market for weeks. When it was finally resolved, stocks blasted higher on the first trading day of January and haven't stopped since.

Is the debt-ceiling debate going to play out in a similar manner once again? On a political level, nothing much has changed: The House of Representatives is unlikely to pass anything that President Obama would be willing to sign. The market doesn't like the uncertainty of this, but I'm not sure why it should even care that much. We will be stuck with Obamacare no matter what, and the inability of the government to operate would probably do more good than bad.

Right now the market doesn't seem too concerned about this issue, but it all provides a convenient excuse for more selling. We'll have to watch carefully to see how things develop.

The other issue out there right now is potential tapering by the Fed vs. slow economic growth. The U.S. market has apparently changed its mind about how wonderful it is that tapering will be delayed. The market has been giving back more and more of the gain that was produced when the Fed surprised us with the no-tapering decision. There seems to be the realization that maybe a slow economy isn't all that good.

The same issue is playing out in Europe, but that continent is in worst economic shape than the U.S. is, so the debate is about additional easing to offset the slowing economy. While markets also love the cheap money provided by central banks, there seems to be more skepticism about how much it really helps.

These two issues are giving the bears some ammunition, and we've had three trading days of selling as a result. The S&P 500 has given back the recent breakout and is now sitting around some key support. The uptrend is still intact, but there was weakness under the surface Monday in some key leadership names, and a cooling of momentum.

This market has been led by good action in individual stocks, rather than correlated strength due to macroeconomic matters. Most of the leading stocks barely corrected in August when the indices were struggling. At this juncture, those leading stocks are our best indicator of overall market health. The indices have been deceptive for a while, and it has been much more productive to focus on individual stock-picking rather than on broad market timing.

The market is still looking OK, but it has lost energy and is in danger of gaining some downside momentum. I cut back positions Monday and haven't see much I want to buy, so I'm becoming more defensive -- but I don't see any reason yet to be more aggressive in dumping positions.

We have a quiet, slightly negative start and not a whole lot of interest in the early going. Stay open-minded and vigilant.

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