Follow the Leaders

 | Sep 25, 2013 | 4:30 PM EDT
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Once again, the indices struggled and breadth was weak, but there were plenty of perky pockets of action for stock-pickers. As I mentioned earlier, the theme of this market lately has been finding the hot trades while the broad indices churn and do little.

There is obvious concern about the debt ceiling, but there is a lot of money sloshing around trying to find relative performance. This has been a terrible year for active managers and one way they can catch up is to nail good trades when the indices aren't doing anything.

There is quite a bit of talk about how this is the first time the SPDR S&P 500 (SPY) has been down five straight days this year. That suggests that it is oversold and ready for a bounce, but even so, the bigger picture looks increasingly murky. We are still making good money on the long side but keep an eye on those leadership stocks. When they falter, things can turn very quickly.

I'm sticking with a bullish bias not because the indices look that great but because trades are working. When that changes, so will I.

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

Sept. 25, 2013 | 10:27 AM EDT

Into the Tapering Era

  • Is the influence of the Fed fading?

The theme of this market lately has been stock-picking. Although the indices have done little, there has been great trading in individual stocks. The big-cap momentum favorites, China-related names, solar energy, shippers and biotechnology have provided good movers recently. Even the IPOs are performing well, although some may say there is a glut of supply.

This action that rewards stock-picking reminds me of the trading environment prior to the advent of quantitative easing. I am hesitant to think it, but perhaps the influence of the Fed is starting to fade as we move into the tapering era.

For so long this market has danced to the tune of central bankers. Individual stock-picking didn't matter much, and we often had illogical action because the only thing that really mattered was liquidity.

It is refreshing to see a return to old-fashioned stock-picking, but I hope that macro factors don't constrain this action. I used to love flat action because that is when individual stock-picking would allow for great outperformance. We are getting a taste of that again and I'm hungry for more.

The market is weakening now, and traders are starting to wonder if we are going to have another late-day pullback like yesterday's. This action in the indices is a function of not wanting to hold just in case negative headlines come out of Washington, but when stock-picking is working, we have a tendency to shrug this stuff off.

If we take out the morning lows, it is likely to cause panic, so tighten up those stops.

Sept. 25, 2013 | 10:27 AM EDT

On the Sunny Side

  • Something is moving the solar names.

We have choppy, inconsistent market action again. The market seems to be uncertain whether it needs to worry about this debt ceiling or not. Stock-pickers don't want to exit a market that has been good to them lately, but they are nervous about the potential for negative headlines.

While the indices continue to do nothing, very good action is under the surface. Breadth is positive, and the Four Horseman continue to act well. Facebook (FB), GSV Capital (GSVC), JinkoSolar (JKS) and Sarepta (SRPT) are a few names I've mentioned recently, and they are doing well, too.

The main group on my radar this morning is solar energy. I'm not sure what is moving the group but I have positions in JKS, Trina Solar (TSL) and JA Solar (JASO). All have good-looking charts and are attracting attention.

The indices are testing the early lows, which makes astute stock-picking very important. Don't be shy about locking in gains when you have them. This is an environment where micromanaging your positions is likely to pay off.

Sept. 25, 2013 | 7:52 AM EDT

Conditions Are Ripe for a Market Turn

  • The best thing we can do is to manage positions very tightly.

Let go of certainty. The opposite isn't uncertainty. It's openness, curiosity and a willingness to embrace paradox. -- Tony Schwartz

It is often said that choppy and inconsistent market action is a sign that a change in the trend is developing. The theory is that as market players change their view of the market it will create greater and more severe swings.  It is human nature for people to change their views incrementally rather than suddenly and completely. That is why market tops are a process that take time to play out.

The major indices have been down four straight days now, and we had a particularly ugly intraday reversal yesterday, following a strong bounce in the morning. Over the past few days we have had major swings in the key leadership stocks. On Monday morning, they looked quite poor but regained their footing and bounced strongly before selling off slightly again yesterday afternoon.

What has been particularly challenging is how the indices are not doing a very good job of reflecting the underlying action. If you have focused on momentum leaders and select small-caps, you would have no idea that the market has undergone a four-day pullback.

The big question we have to contemplate is whether the recent weakness in the indices and the choppiness in underlying stocks is a sign of more struggle as the market deals with this debt ceiling political debate in Washington. Back last November and December 2012, the market had a major negative reaction to that uncertainty. So far we have had a relatively minor response to the debate, but the potential for a headline that will impact trading is quite high.

The other thing impacting the market is how the market is more concerned about the economy slowing, even if it does result in a delay in tapering off bond buying by the Fed. We are now trading lower than when the Fed made its announcement that there was no tapering, and bad economic news is being treated as a negative. If the market fails to embrace further quantitative easing as a major positive, it changes the complexion of the market quite a bit.

Overall, we have increased instability, indices that are failing to reflect the underlying action and a number of major fundamental concerns of which we see endless coverage in the media. Conditions are ripe for a market turn, but if it is a top, it is going to take a while longer for it to develop. What makes it even more challenging is the good action in many individual stocks. As I've said quite often lately, if you have focused on individual stock picking, you probably aren't even aware that the overall indices are acting poorly.

My game plan is to increase my caution level as this volatility picks up but to stay focused on individual stock picking while managing positions tightly. I don't try to make major market timing calls. My approach is to listen to the market and react as conditions change. Conditions are becoming more troubling, but stock picking is working, so I'm going to try to navigate carefully and pick up some good trades while watching to see if the overall trend starts to falter more.

It is an uncertain environment right now, and the best thing we can do is to manage positions very tightly while the fundamental developments play out.

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