Running on Anticipation

 | Oct 14, 2013 | 4:33 PM EDT
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The bulls are hoping the politicians continue to move slowly in agreeing on a deal, as the market is doing such a fine job running up in anticipation of a solution. An actual deal would probably be a letdown at this point, but you still have to be pretty brave to bet on a sell-the-news reaction in this market. There is an appetite for stocks, and despite plenty of good reasons to be cautious, the buyers are just not backing down.

All year long, the toughest thing to do in this market has been to call a top. Even when conditions seem ripe for a reversal, we will dip momentarily and then go right back up when the dip-buyers jump in. The dip-buyers bring in the chasers, and the chasers squeeze the bears.

The easy call at this point is to predict a market turn when a deal is finally made in Washington. We have gone up so much already that it seems logical that a deal would cause some profit-taking, but I've watched this market too closely for too long to think that scenario will play out. The buyers are in control, and they are more inclined to buy a dip than to bail out on a pullback.

We have some earnings reports rolling in now, so hopefully we can shift the focus away from politics a bit but until a deal is inked, or we will be forced to hear about it endlessly. The good news is that the bulls are in full control of this market and aren't worried about a thing. Have a good evening. I'll see you tomorrow.

Oct. 14, 2013 | 1:08 PM EDT

Still Anxious About Getting Left Out

  • This clearly remains the dominant emotion, as it's been all year.

The market continues to act as if there is a solid deal in Washington. Some might even argue that the indices have more than priced in an agreement, especially since any deal will simply put off the key issues for a few months.

In any event, not only is this market chugging along, but it's also enjoying some strong speculative action in small-caps. Normally when there is nervousness, you'd expect to see money flow into safer big-cap names, but in this market the small-caps are leading and the best action of all is in some of the most risky Chinese stocks.

The big question for us to consider is what will happen when a political deal is made. Since the market has already moved up a great deal, will that trigger some "sell-the-news" action? This has not been a good bet this past year when it's come to other highly anticipated events, and I believe it is unlikely we will see a sudden rush in the indices.

What you need to keep in mind is this primary motivating factor: Money managers have lagged badly this year, and they need to make up relative performance. This market has made it extremely difficult for longs to build positions, and that is why these folks have been so aggressive in buying any and all weakness.

Market players are far more worried about being left out of further upside than they are about being caught in a pullback. The bears call that "complacency," and they see it as a negative factor -- but it has been the dominant emotion all year, and I don't see anything that is going to change it right now.

Oct. 14, 2013 | 10:26 AM EDT

A Refusal to Panic

  • Still, we are at the mercy of the headlines.

The most notable characteristic of this market is that it refuses to panic over the mess in Washington. Market players are far more interested in trying to catch some dips than they are about escaping positions in case there is no deal.

We're seeing poor breadth Monday morning -- it's coming in at almost 4-to-1 negative -- but signs of underlying strength remain. We're also seeing speculative interest in small-cap China names such as Bona Film (BONA), China BAK Battery (CBAK), Cleantech Solutions (CLNT), Ku6 Media (KUTV) and Fab Universal (FU).

Since the government shutdown started, the market has had decent support, but last Tuesday buyers grew weary and a bout of selling ensued. It was probably accelerated by program selling, but it was a good illustration of how quickly momentum can shift when there is a minor change in the mood.

The sad thing about this market is that we are at the mercy of the news headlines. Forget fundamentals, earning, charts, economic news and even the Federal Reserve. Until there is some deal in Washington, the indices are going to chop around and offer little opportunity -- unless you are a day-trader flipping for pennies.

The key right now is to stay out of trouble until we have somewhat greater clarity. There is some decent trading to be had, but you have to keep time frames very short.

Oct. 14, 2013 | 8:37 AM EDT

A Surprisingly Optimistic Market

  • Given this environment, buying the dips remains the best strategy.

"It's time for Democrat leaders to take 'yes' for an answer." -- Sen. Mitch McConnell (R-Ky.)

The politicians continue to dither and debate, but the market remains surprisingly optimistic about the likelihood of a solution. We saw a huge move Thursday and Friday in anticipation of a deal, and there is some disappointment Monday morning following the lack of progress this weekend -- but the market still doesn't seem to be worried that a default is likely on U.S. Treasury obligations.

The market knows that the politicians never come to an agreement until the last minute, and there are some positive comments from both sides about progress. But given the potential fallout if a deal is not made by the deadline on Oct. 17, the market is behaving in quite a sanguine manner. Market players appear far more concerned about missing out on a relief rally if a deal is made than about being caught in a big gap down if a deal isn't struck.

Over the last few years, market players have been trained to believe that buying a crisis is always a good idea. The market never stays down for long as the Federal Reserve or some governmental agency comes to the rescue and keeps the market propped up. That mentality continues to flourish, and no one really seems to believe that a deal won't be made in the nick of time.

The bigger issue, really, isn't whether a deal will be made but whether the market will continue to run up after the sizable jump last week. It would seem that we have already priced in a deal, but one thing we seldom ever see anymore is a "sell the news" reaction.

In fact, if you look at what happened back in January following the fiscal cliff deal, you'll remember the stock market continued to run up for months. There were the usual bears predicting a "sell the news" reaction back then, but they were crushed, as stocks never even looked back.

If this deal is done, the bulls do have a number of things that may help the upside momentum continue to build. This crisis has lessened the likelihood that the Fed will taper QE any time soon; we have earnings season starting this week; and the preoccupation with the big picture has probably helped to reduce expectations.

On a technical level, the big bounce last week made the indices slightly extended, but the coming weak open this morning is fixing that. A little churning above the 50-day simple moving average, moreover, will set the market up well for a run at the September highs.

The market will obviously dance around to the headlines out of Washington, but I remain bullish about individual stocks and will look for entries. I suspect I'm not alone in this, and that dip-buyers are going to be looking to jump in this morning.

We might be jerked around by Washington this week, but the mentality is that it will work out in the end -- so the best action is to buy the dips when possible.

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