Part of the Process

 | Oct 21, 2013 | 4:37 PM EDT
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Is it the pause that refreshes or the start of a topping process? Although the indices had only minor losses, the screens were littered with some ugly reversals in the high-momentum names. Stocks such as Tesla Motors (TSLA), SolarCity (SCTY), Facebook (FB), JinkoSolar (JKS) and Google (GOOG) reversed sharply and closed poorly.

After the run we've had, some profit taking is well justified, and the fact that we have payroll numbers reported in the morning was an additional catalyst for locking in some gains. In the bigger scheme of things, action like we had today is needed to keep the market healthy. Sometimes the media make is seem that if we aren't up every day there is something wrong with the market.

At this point I see no reason to believe that the market is topping out. Yes we have been a bit frothy and the contrary indicators have been piling up but there is still nothing in the price action to indicate that the underlying support is starting to erode. In fact, I suspect that many bulls are hoping for some weakness so they can build up positions.

After the close, Netflix (NFLX) put up a blow-out report much like we had from Google, and that may help to heat up the momentum again. There is still a big appetite for hot stocks, and a little pause in the action is going to change that. Have a good evening. I'll see you tomorrow.

Oct. 21, 2013 | 1:08 PM EDT

Cooling Down

  • This market needs to catch its breath.

After a frenzied to start the day things have cooled off. There is only limited selling pressure but aggressive chasing has slowed and there's weakness in a number of momentum leaders, including Google (GOOG), Tesla (TSLA), Amazon (AMZN) and LinkedIn (LNKD).

These stocks definitely could use some rest, so it isn't very worrisome but we'll have to watch and see what happens to the speculative fervor in some of the small-caps. This has been a great market for stock-picking but it is becoming increasingly difficult to find new entries as everything becomes technically extended.

Even though I constantly warn against trying to time market turns, I often find that I gradually have less long exposure as the market becomes extended simply as a function of my inability to find new stocks to buy. My market exposure is much more a function of individual stocks than big-picture considerations, but often the action in the individual stocks I prefer is a tipoff of macro issues.

I still don't see anything wrong with this market but it does need to catch its breath. There are a few things I'll consider for possible buys later in the day, but my focus now is on protecting profits. A couple I'm watching for possible closing buys are Synergy (SYRG) and Sarepta (SRPT).

Oct. 21, 2013 | 10:24 AM EDT

Buyers Aren't Backing Off

  • The hunt for more long exposure continues.

Although the indices are mixed and breadth is only slightly positive, aggressive momentum trading continues. SolarCity's (SCTY) parabolic move is a perfect example of this, Google (GOOG) is holding up well after its giant move and Apple (AAPL) is up for its ninth straight day. The SPDR S&P 500 (SPY) just took out its opening high and the hunt for more long exposure continues.

The key to success in this market is to stay focused on individual stocks. There are very hot pockets of momentum and the buyers are not backing off. The bears are arguing that this action is too euphoric but if you are in the right names, you can make money quickly. Just stay vigilant and manage positions carefully.

I've been flipping into big moves but I've added to my position in Himax (HIMX), which I mentioned Friday as a sympathy play on GOOG. A move above $11 should bring in the momentum money. Zhone Technologies (ZHNE) is another I want to build for a long-term play but, other than that, I'm not finding much new that I want to add.

We really need some resets after this run, but that isn't the way that momentum traders think when it is this hot.

Oct. 21, 2013 | 8:23 AM EDT

Weak Action Is Probably Bullish

  • Too many bulls are hoping for weakness to put money to work.

"Exuberance is beauty." -- William Blake

As we kick off a new week, the big question to ponder is whether we can keep this very strong momentum going. The pessimists, who were looking for a reversal after the political deal in Washington was finally made, were crushed as the market not only didn't pause, but picked up even more steam. The fear of being left out is dominated the market right now and all the negative fundamental arguments that the bears keep dredging up are being completely ignored.

I have to admit I'm a little concerned about the frothiness of the action. There seems to be almost no fear and I heard more than one trader compare the action to 1999. But what is most challenging is that there just aren't many setups left. We had more than 1200 new highs on Friday, and if you aren't willing to pay up for stocks that are already extended you simply are not going to be able to put much money to work.

But it is very important to keep in mind that when a market is running this hot it doesn't suddenly reverse and go straight down unless there is some huge unexpected, negative news.  Technically, this sort of action creates very strong underlying support. Many buyers may not be willing to chase, but they sure would be happy to buy if we have a dip.

Another complexity is that we are now in the heart of earnings season. Until the Google (GOOG) report on Friday, things were pretty lackluster, with poor reports from IBM (IBM), eBay (EBAY) and a number of other tech names. GOOG's report helped to catch the already-poorly-positioned bears and was a big reason we saw such strong momentum on Friday.

The good news for the bears is that GOOG's earnings helps to increase expectations for many stocks and create greater risk of disappointment in the future. GOOG's earnings weren't that fantastic, but expectations were low and that is all that really mattered. There is going to be a little greater risk now as more reports roll in.

My main message recently is that there is too much underlying demand for stocks to bet on a major reversal. That strong support is why I don't believe we would have much of a 'sell the news' reaction to the deal in Washington.  It certainly was logic to look for that sort of action since we had run up so much into the news, but what the bears overlooked was that money managers are anxiously chasing performance. 

This has been a terrible year for hedge funds and active managers. The market blasted higher, starting on the first day of the year and the lack of correction has made it nearly impossible to catch up once you were behind. With the year quickly winding down, there is even more concern about trying to tack on some relative performance.

The market is a bit extended and frothy, but there is no reason to believe that we are going to suddenly reverse and go straight down. Far too many bulls are hoping and praying for some weakness so that they can put money to work. Weak action is probably more bullish than bearish at this point.

It should be an interesting week with politics off the table for a little while and the focus on earnings. Stay respectful of the price action and don't be seduced by the big-picture bears, who have been dead wrong for a very long time.

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