Heed the Warning Signs

 | Oct 22, 2013 | 4:10 PM EDT
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Although the indices were strong and breadth was good, it was one of the oddest days of action in a while. What was so odd was that the high-momentum names, Netflix (NFLX) in particular, jerked around wildly. A few minutes of panic selling set in at midday, but most of the big-cap momentum favorites found support and finished at intraday lows.

I've been commenting for a while about how it has been a good market for stock-picking as the action has been less correlated. That shifted today and it looked like the machines were back in charge. The high-momentum names moved mostly in unison and tripped both chasers and sellers with tight stops.

If you just look at the indices, you wouldn't see anything to worry about. The market continues to trend straight up to new highs on good breadth and is not terribly extended. But the character of price action shifted somewhat as key leaders were volatile and many acted poorly. This market has been so strong for so long that poor action can be excused, but it demands that we be more vigilant in case this weakness expands.

I don't want to sound overly negative but there were warning signs in today's action that deserve attention. It may turn out to be nothing, like so many other little blips this year, but increased awareness can't hurt.

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

Oct. 22, 2013 | 2:05 PM EDT

A Shift in the Action

  • The action in high-momentum and speculative names worries me.

One of the main tenets of my trading style is to be reactive to price action rather than anticipatory. Most market timers are not very precise and I generally find that it is more profitable to stay with the trend as long as possible and react quickly when conditions change.

Today I'm seeing a shift in the price action and that is causing me to react by selling positions and being more defensive. I suspect that the big swing this morning in many momentum names was driven by algorithms, but this sort of volatility is often a sign that conditions are starting to change. I want to make sure that I make the mental adjustment just in case this pressure increases.

Of course, the big risk of being overly reactive is that this market has had a strong tendency to shrug off these short-term hiccups and to resume its uptrend quickly. Just six trading days ago, on Oct. 15, a similar meltdown in high-momentum names shook out a lot of trend followers, but within days the indices were back on track and running straight up.

I've been maintaining a bullish bias for a while and I'm not going to rush to declare that a top is forming, but this action in high-momentum and speculative names worries me, and I'm going to be extra careful going forward. It has been a good run and there is nothing worse than giving back gains. I always want to keep my accounts as close to highs as possible and the way to do that is not to let big positions pull back too much.

There's a slight bounce as I write this, but the close today will be particularly interesting. The machines have been busy pushing us around and I expect to see another strong move in the closing hour.

Oct. 22, 2013 | 10:30 AM EDT

The Machines Are Jamming This Move

  • Likely triggered by the jobs news.

The main justification for the strength this morning was that the jobs news was poor enough to push off tapering for a while longer. I'm not sure is the driving force, but it doesn't matter as the buyers are happy to buy and keep the momentum going.

While the indices are running strong and breadth is extremely strong, I'm not seeing as much euphoric chasing in the big-cap momentum names. Netflix (NFLX) reversed hard and while Google (GOOG) and Apple (AAPL) are green, they are underperforming. I suspect the reverse in NFLX is making the usual chasers a little less aggressive while buyers are rotating into lagging groups like precious metals, oil and retail.

NYSE breadth is running 2,479 gainers to 380 decliners, which is the best level we have seen in a while. It is so lopsided it makes me think that the machines are jamming this move. They were likely triggered by the jobs news and are now in full buy mode. It may not seem natural but it can last longer than you think.

I'm not thrilled with what I'm seeing on my screens and haven't done much. I added some Gray Television (GTN), which is working on a cup-and-handle breakout, and I like the Organovo (ONVO) news, so I am accumulating on dips. I'd like to add a number of stocks, like Facebook (FB) and Sarepta (SRPT), but I'm going to stay patient.

At the time of publication, Rev Shark was long GTN, ONVO, FB and SRPT.

Oct. 22, 2013 | 8:18 AM EDT

Won't Go Quietly Into the Night

  • Don't be too quick to count out this market.

"Pessimism becomes a self-fulfilling prophecy; it reproduces itself by crippling our willingness to act." -- Howard Zinn

After some overheated action, the market had been due for a pause -- and that is what we saw Monday. It was a bit sloppy out there, as many of the high-momentum names suffered intraday reversals and closed weakly. Still, breadth was around even, and we didn't see any notable technical damage done.

Helping matters this morning have been Monday night's strong reports from Netflix (NFLX), VMware (VMW) and Transocean (RIG), as well as a couple of others. However, the focus is on the delayed September employment report, which had originally been due for publication earlier this month, during the government shutdown. Expectations here are fairly high, but these results will be offset by the damage that the battle in Washington has done to the economic momentum that may have been building.

I'm doubtful that the jobs news is going to matter all that much, but it will be used to explain whatever the market decides to do. There will once again be lots of talk about the Federal Reserve's potential to taper quantitative easing, and whether the jobs number will speed it up or delay it.

The bears have been hoping that the indices would suffer from the macroeconomic news, but market players just haven't cared about the headlines. They have been focused on making money in individual stocks, and the moaning and complaining about the big picture has been widely ignored. At some point the market will correct a bit more deeply -- and the bears will then be quick to tell us that they knew it was going to happen. But, for now, the negatives haven't mattered.

What has been most notable about this market lately has been the extremely strong momentum. While we saw some reversals in names like SolarCity (SCTY), Tesla (TSLA) and Facebook (FB) Monday, interest remained in other leading names such as Apple (AAPL), Netflix and First Solar (FSLR). Still, many stocks simply needed a rest after huge moves.

What is important now is to not be sucked into the bearish hope that the market is about to collapse. As usual, the bears have a long list of negatives on hand: a struggling economy, overvaluation of stocks and a continuation of the political battle in Washington. There is even a growing pile of contrary indicators as a result of the recent market strength.

Maybe this time the turn will come, but it sure hasn't paid to try anticipating a market reversal. Time and again, the bulls have come right back after a very brief pause. The big-picture arguments just haven't matter much.

Again, we'll see what happens on the jobs news, but I expect it to be forgotten quickly and for the bulls to continue providing good underlying support. A dip will be seen as a buying opportunity, rather than the start of a market top.

This market is not going to die an easy death. Don't be too quick to count it out.

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