The Bulls Stay in Control

 | Oct 18, 2013 | 4:20 PM EDT
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While the indices had solid gains and breadth was good at nearly 2:1 positive, they failed to reflect the frenzy of momentum buying. One trader's index of high-momentum stocks showed a gain of nearly 3% vs. a gain of a little over 1% for the Nasdaq.

Clearly, the strong report from Google (GOOG) was the trigger for the momentum buying. The hot money chased anything Internet-related, including Facebook (FB), Amazon (AMZN), LinkedIn (LNKD), Baidu (BIDU), Yelp (YELP) and others. Other momentum favorites like SolarCity (SCTY) and Tesla (TSLA) benefitted as well.

The action was so hot that I'm concerned we are starting to see a blow-off top. On the other hand, while the indices are extended we really have nothing more than another V-shaped move to new highs. These moves have occurred regularly this year and more often than not, the indices only become more extended.

The irony of this action is that it creates even more performance anxiety, which leads to more chasing. It is a vicious circle and a big reason why we have these V-shaped moves.

GOOG changed the tone of earnings season today, but a flood of earnings reports are due next week and it is likely that we won't see this much euphoria again. Nonetheless, the bulls remain in firm control and there is no reason to be overly bearish just because the action is "too good."

Have a great weekend. I'll see you on Monday.

Oct. 18, 2013 | 10:30 AM EDT

An Absolute Buying Frenzy

  • The only fear is the fear of being left behind.

Not only is the market holding up well, there is an absolute buying frenzy in high-momentum names. Google (GOOG) is leading the charge and dragging along Facebook (FB), Amazon (AMZN), LinkedIn (LNKD), Baidu (BIDU), Yelp (YELP), Qihoo 360 (QIHU) and others. The only fear is the fear of being left behind.

Breadth is very good at about 3:1 positive. There is weakness in the biotechnology sector but Internet-related plays are roaring, and oil and solar energy are doing well.

It is so hot that it is becoming difficult to jump on the speeding locomotive. I'm selling a few things into strength but lately my sales have been premature and I often have to rebuy.

NQ Mobile (NQ), which I discussed Thursday, continues to breakout on very good volume. Zhone Technologies (ZHNE), which I've highlighted before, is blasting higher on earnings and I'm looking to add to that position as it sets up again.

I've started a position in Organovo Holdings (ONVO), which is a nice-looking breakout from a base, and I'm inching into some Himax (HIMX) as a sympathy play on GOOG. HIMX and GOOG recently entered a joint venture and should see a little interest as market players look for other ways to play the GOOG blowout.

Even though I've been talking about how we need to stay with the trend and ignore the anticipatory bears, the action this morning is almost too hot. Many folks are on the wrong side of this action and they are starting to panic buy.

At the time of publication, Rev Shark was long FB, ZHNE, NQ, HIMX and ONVO although positions may change at any time.

Oct. 18, 2013 | 8:25 AM EDT

Ignore the Market Naysayers

  • There are good reasons for the momentum to continue.

We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses. --Abraham Lincoln

Nothing is more important to trading success than having the right mindset. If your thinking is in the right place, you can attack the market with more confidence and greater aggression. To do that, you have to believe that you are in tune with the market, not fighting it. When you are consistently stopped out of positions and taking losses, your thinking and emotions will be off and you need to make adjustments.

One trick I find helpful is to focus on reasons why the prevailing trend can continue rather than dwell on why the market is going to reverse. The majority of market pundits are always trying to predict when the market trend is going to turn. They are always coming up with arguments why the market can't continue to do whatever it is doing.

The problem with focusing on turning points is that it almost always takes you out of the market too early. As I've written a million times, market trends almost always last longer than seems reasonable. The market doesn't think like an individual, and our feeling about what is reasonable behavior will often lead us astray.

The current market run is a good example of why it is better to focus on what can go right rather than what can go wrong. The bearish arguments are almost too obvious. Virtually everyone saw the sell-the-news setup after the deal was made in Washington, which was probably one of the main reasons it didn't work. Everyone sees that we are a bit overbought and everyone knows that the economic news is not so great. It is very easy to make a good argument about what can go wrong. Just read Doug Kass's commentary if you want a well-reasoned argument about why this market is doomed.

The bullish argument is a bit harder to make mainly because it is more a function of psychology than fundamentals. The bulls still have the Fed on their side, and it has been helpful that tapering has been delayed, but the main thing driving this action is the thirst for relative performance.

For quite a while there has been very good action in individual stocks. There have been pockets of momentum in big-cap names and very wild speculative action in small-caps, particularly China names. Aggressive traders have been doing quite well and they just aren't worried about the big-picture arguments that keep popping up.

Ironically, this bullish attitude is viewed by the bears as a sign that a top is near. Maybe so, but it's already persisted for far longer than they had anticipated. We've been hearing about the high level of complacency for weeks but it hasn't mattered.

This morning the good report from Google (GOOG) gives us another reason to believe that the trend upward can continue. We are already seeing sympathetic spillover to names like Facebook (FB). The market had good reason to fall apart after IBM (IBM) and eBay (EBAY), but market players are still beating the bushes looking for opportunities.

Yes, the indices look extended but how many times in the past few years have we had these V-shaped bounces that just keep on running? It wouldn't hurt to have consolidation, but anyone who has followed this market in the last few years should be very aware of the tendency of an extended market to become more extended.

I'm not suggesting that we be wild bulls, but we need to focus on what can go right. There are good reasons for the momentum to continue. When the price action shifts we will need to adjust quickly, but the bigger danger is over-anticipating a disaster.

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