A Market at the Mercy of Politicians

 | Oct 10, 2013 | 4:26 PM EDT
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The market celebrated a deal to end the government shutdown and raise the debt ceiling, but there is one problem: There isn't any deal yet. The market is counting on the politicians to finalize an agreement with the president this evening. If it isn't done, it is going to be a brutal open in the morning, and even if it's a done deal, you have to wonder how much further we can run when all that has been done is to put off the hard decisions for just six weeks.

Volume could have been better, but the point gains were huge, and we fixed quite a bit of the recent damage. The bears will remind us that many charts are still broken and that a low-volume, news-driven bounce shouldn't be trusted much. Of course, if you have been trading this market the last few years, you are very aware of how often these big oversold bounces turn into V-shaped moves straight back up.

Right now, we are the mercy of the politicians. If they do what they have been indicating, we are likely to see a bit more chasing, but you have to be a real Pollyanna to believe that the political battle is coming to an end. I'm positioned long but did sell down a few things. If we have a deal and we gap up further in the morning, I'll be looking to lighten up further, but at this point it is a coin toss as to what is going to happen when the politicians meet tonight.

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

Oct. 10, 2013 | 1:12 PM EDT

Back on Track

  • This action helps me get accounts back to all-time highs.

Until Tuesday, the market was doing a very good job of anticipating the type of action we have today. It was obvious we would have a massive rally as soon as some progress was made in Washington, but the bulls got nervous and when the high momentum stocks broke down it triggered stops and shook out quite a few folks who felt they had to be disciplined and exit positions that hit key levels.

Folks who use a momentum style of investing tend to have big runs when the market is trending up but sizable downdrafts when the turn occurs. It is a function of not being overly anticipatory about market direction.

I have always experienced this phenomenon in my accounts. I will have a nice run with steady gains and then take a punch when there's a sudden breakdown. I usually have a good cushion by the time that occurs, but it is still painful to give up gains. I still find that staying bullish until there is actual negative price action is still preferable to constantly trying to time market turns.

My focus now is recouping recent losses and putting my accounts back at all-time highs. That is always my focus and is far more important to me than absolute returns. As long as I'm near highs, I always have the potential to continue to produce superior gains.

Unfortunately for trend traders, the bounce we had today will leave many sitting on the sidelines. They took their stops Tuesday and there has been no time for stocks to set up. The action today was not predicted by the chart action. In fact, Investor's Business Daily had just changed its market view to "correction," which is the same sentiment that many momentum investors had.

It is going to be interesting to see how much risk market players are willing to take overnight. There is a potential for a political deal to blow up, which would gap this market down big tomorrow. For now, the market is satisfied that progress is being made and that the market is back on track.

Oct. 10, 2013 | 10:31 AM EDT

Welcome to Bounce City

  • Running on hopes of at least a short-term debt-ceiling deal.

One reason the market held up well until Tuesday was that everyone knew there was the potential for big gap-up open on any positive headline out of Washington. Of course, just when market players started to grow more nervous, that is exactly what happened.

The Republicans aren't meeting with President Obama until after the market closes this afternoon, so we have the potential to run for a while on hopes of at least a short-term deal, which will calm fears about the debt-ceiling problem. All it does is kick the can down the road a bit further, but that is good enough for the market.

Unfortunately, if you aren't long coming into the day it is not easy to jump into. I've been a net seller of Facebook (FB) and Sarepta (SRPT), which I had been nibbling at on dips. My only significant new buy so far is oil and gas play Synergy Resources (SYRG), which is attempting to break back up over resistance in the low $10s.

It is a sea of green with breadth nearly 10:1 positive. All major sectors are up except precious metals. We don't see the term that often anymore but this is a "risk-on" day and they are buying everything.

There is a good chance there will be some political disappointment after the meeting with President Obama and we'll have to consider how much overnight risk we want to hold, but for now, it is Bounce City.

Oct. 10, 2013 | 8:40 AM EDT

Things Are Perking Up

  • There's finally hope that the market can move beyond politics.

"If we cannot get an agreement with the president at some point in time in the next few days, we'll look at something short term." -- Rep. Steve Scalise (R-LA)

The market is perking up as the stalemate in Washington is starting to thaw. Both sides are still dug in, but there is talk that the Republicans will consider raising the debt ceiling for a few weeks in order to avoid the immediate crisis. While that may just be delaying the day of reckoning, it is helping to ease the pressure on the market this morning.

Up until Tuesday, the bulls were quite confident that a deal would be done and that the market would resume its upward trajectory, but nervousness set in Tuesday and a nasty bout of profit-taking took hold of the leading momentum names. Nothing really changed fundamentally, but when technical levels started to crack, the selling accelerated and fed on itself.

On Wednesday we saw some bounce-back in the major indices, but many of the broken momentum names continued to struggle while money rotated into more conservative stocks, especially among consumer staples and food-related names.

The dip-buyers did show up Wednesday, but they weren't their usual buoyant selves. The political uncertainty kept them from chasing the high-momentum names they generally favor, but this morning they are regaining their confidence and already names such as Facebook (FB), Tesla (TSLA) and Netflix (NFLX) are up sharply.

The bears will argue that a temporary deal in Washington is just going to put us back in the same situation in a couple of weeks, but the market is happy to worry about that later. There is nothing the bulls would like more than to forget politics and start to focus on earning season, which kicks off in earnest next week.

The tricky thing now is that quite a few stocks have suffered technical damage this week, and now they have the potential for V-shaped moves if the situation in Washington improves. The dilemma is that there aren't any great technical setups when this occurs -- but the combination of short squeezes and chasing by underinvested bulls tends to give us some very strong moves when we see a reversal.

I don't expect the deal-making in Washington to go smoothly, but a short-term deal would allow both sides to save face while they work on something else. Ultimately, no big deal will be done until it absolutely has to be done, which means we are likely to see a repeat of the past week. But at least there will be some volatility to trade if and when it happens.

A big open is on the way, along with some hope that we can move beyond Washington. I don't think we can sound the "all clear" signal yet, but at least some of the gloom will be lifted and maybe we can focus again on individual stock-picking.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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