The Market Caved

 | Oct 03, 2013 | 4:51 PM EDT  | Comments
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Stock quotes in this article:

bita

,

omer

,

jks

,

srpt

,

vips

,

pacb

,

galt

,

sfun

,

tsla

,

lnkd

,

nflx

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FB

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qiwi

,

beat

,

sohu

After two days of big bounces and strong action under the surface the market caved into the anxiety over the government shutdown.

We managed to bounce back quite nicely around midday as some chatter about a possible deal circulated, but we failed to gain further traction as nothing new emerged.

The big difference today was that the pockets of momentum that have been so strong lately dried up. The Four Horsemen -- Tesla (TSLA), Facebook (FB), Netflix (NFLX) and LinkedIn (LNKD) -- were all down and there wasn't any notable big-cap leadership. Small-caps suffered their biggest losses since Aug. 30.

Technically, the major indices have some issues now. But as I keep repeating, it has been individual stock picking that has worked in this market and I'm not ready to conclude that one bad day has turned the tide. The big-picture worries are having more impact, but we are going to dance around now to every story or rumor about a possible deal. There is a good chance we are going to see a big gap up one morning when the folks in Washington grow up and get things done.

Even though it was a rather chaotic day, there continued to be some good trades if you stayed selective. BioTelemetry (BEAT) and Sarepta Therapeutics (SRPT), for example, which I've discussed quite often, were up quite nicely and seemed little concerned about the overall market action. There were a number of small biotechs and other names like Qiwi (QIWI), VipShop Holdings (VIPS) and Sohu.com (SOHU) that made strong moves as well.

The market is going to stay tricky as we are held hostage now to the headline news, but at least the action is not that highly correlated so we can continue to engage in individual stock picking. I still feel pretty good about the opportunities that are coming up, but it will be nice to not have to worry what the politicians might do next.

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


Oct. 3, 2013 | 2:09 PM EDT

Profit-Taking Finally Kicks In

  • But how long will it last?

The government shutdown is finally having the impact on the market that the bears were hoping it would. But after the run in leading stocks lately, profit-taking was due to kick in. The Washington stalemate is a good excuse, but how long will it last?

We are already seeing a bounce as market players try to get in front of a deal. We all know the market is going to jump if some agreement is made, so we get hypersensitive to every headline. The New York Times is reporting talk of a deal with House Democrats that involves the medical device tax, and that took the market off the intraday lows.

I'm getting the impression that the Republicans are feeling pressure and are going to try hard to structure something fairly soon. With that in mind, I'm holding tight to some of my longs and starting to nibble at a few things. I don't think the market is going to go straight back up while the political wrangling plays out, but the potential for a big gap up is extremely high when a deal is made.

I am trying to stay focused on stock-picking rather than the gyrations caused by headlines, but we need to take advantage of the volatility created by the political battle. I think a deal will come eventually, so I'm leaning toward adding longs.


Oct. 03, 2013 | 10:37 AM EDT

The Bears Bring It

  • But dip-buyers aren't out of the picture just yet.

One important thing that has benefited the market the last couple of days is the Pavlovian response by the dip-buyers to a gap-down open. They tend to automatically jump in and buy without thinking about it much. It is almost a self-fulfilling action since the more it works, the more automatic the response.

This morning we didn't have a gap-down open and ended up with selling pressure instead. I suspect that if the market had opened weakly, it might be positive by now. Instead, we are seeing lots of flipping to protect recent gains.

The bears were due for a little success after being shut out the last couple of days, but I don't think the dip-buyers are going to go away.

I believe the Republicans are moving closer to folding on the budget battle but they need to save face. If they can get some sort of small concession, they can justify themselves and move on to the more important debt-ceiling debate.

As I write, the S&P 500 is testing yesterday's lows, which is the key technical level right now. If that fails, we should see another round of sell stops trigger.

With the change in character this morning, I'm forced to be more defensive and lock in gains on recent winners like BitAuto (BITA), Omeros (OMER) and JK Solar (JKS), but a few stocks, like Sarepta (SRPT) and Vipshop (VIPS) are strong.

I'm monitoring good patterns I see in Pacific Biosciences (PACB), Galectin Therapeutics (GALT), SouFun (SFUN) and even Tesla (TSLA) and I am looking for entries.


Oct. 03, 2013 | 7:48 AM EDT

I'm a Little More Worried, Now

  • It is becoming quite difficult to find new entry points.

Investors will hit the panic button on Oct. 18 if the debt ceiling has not been raised by then. The market will force Congress's hand. -- Ajay Rajadhyaksha

For the third day in a row the market is gapping down on worries about the government shutdown. We had big bounces following poor opens the last two days, but the bears are convinced that the longer this shutdown continues the more likely the chances the market will falter.

There was no progress in the meeting between Congressional leaders and  President Obama as both sides refused to budge. Bears are now talking about how the shutdown could actually lead to default on debt payments by the U.S. as funds dry up.

So far, the market has shrugged at the political drama. Not only have the indices bounced back after being pressured by fears, but the action in a large group of individual stocks has been exceptionally strong. There are plenty of breakouts to new highs, pockets of strong momentum and speculative action in small-caps. It is one of the better trading environments we've seen in a while.

The action has been so strong in many stocks that the biggest problem is that it is a bit frothy and a number of stocks are becoming technically extended. It has been extremely easy to sell prematurely as stocks keep on running up as they are completely unconcerned about the political drama.

The big question is whether the constant news coverage of the government shutdown is going to eventually impact the strong action under the surface of this market. It certainly is confounding many of the pessimists, but as the current budget battle drags out we will be pushed into confronting the next issue which is the debt ceiling as well.

Logically it seems tough for stocks to continue to act so buoyant when these issues remain unresolved and the fallout builds. But there has been more of an appetite for trading action than anything else and it has rendered the big-picture worries irrelevant. Traders are happily making money by staying with long positions and are doing their best to ignore the hyperventilating of the news media.

Unfortunately, the longer the problems drag out the more likely they will eventually impact the broader action. We have to be ready to adjust for that, but overall it has been a major mistake to dwell too much on the headlines.  Stock picking has worked well and that is where the money is right now.

I have to admit I'm growing a little more worried about the ability of this underlying action to stay so strong. It has been quite remarkable given the news environment and it is becoming quite difficult now to keep finding new entry points. I'm keeping a tight watch on my positions and am going to be very stingy about giving back gains.

Right now the bears have little fear that a deal will be struck, but the potential of a huge market spike on some progress in negotiations is a major risk for those who are betting against this market. We saw the market move up yesterday on nothing more than news of a meeting that was destined to accomplish nothing. When there actually is some movement the bears are going to need to reposition very quickly.

Will the dip buyers do their thing for the third-straight day? Traders love to repeat patterns so they will likely give it a try, but the longer the governmental crisis continues, the greater the likelihood that it will slow down the positive action in this market.

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