Day of Deception

 | Oct 25, 2013 | 4:29 PM EDT
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It looked like just another day of buying and a continuation of the uptrend on the indices but it was deceptive, as Amazon (AMZN) and Microsoft (MSFT) covered up weak action under the surface. Despite the gains, Nasdaq breadth finished with 1,190 gainers to 1,335 decliners, but a number of the momentum favorites, like Google (GOOG), Apple (AAPL), LinkedIn (LNKD) and Tesla (TSLA), performed poorly.

One of the biggest shifts today was that hot money fled China names. This started Thursday when a short seller, Muddy Waters, slammed Chine mobile software company NQ Mobile (NQ) with allegations of fraud. This dredged up memories of how Chinese stocks fell apart a few years ago when one company after the next was accused of fraud, and in many cases it was true. China stocks, particular solar energy, have been among the best performers in recent months, but traders are backing away from the group.

As I wrote last night and this morning, I have concerns about the action in individual stocks, although the indices continue to act fine. There is no glaringly obvious reason to be bearish but a few things have me concerned and pushed me to raise cash. Those things may be quickly forgotten next week but I'm not uncomfortable with cash at this point.

Next week we have the Fed interest rate decision, which means we will be hearing the word "taper" quite a bit. The big issue is how far out tapering has been pushed. The market has been feeling secure that the Fed is on board due to weakness created by the government shutdown but sooner or later, bond-buying is going to be cut back and the market is not going to like it.

We have a slew of earnings next week, with Apple being of particular interest. Earnings always give us trading opportunities, regardless of the overall market action so we will have that to look forward to.

I'm concerned about a few things but this market continues to have amazing underlying support. It isn't going to be easy for the bears to make a dent in it.

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

Oct. 25, 2013 | 8:32 AM EDT

A Gut Feeling

  • Being defensive and staying selective about new buys.

Despite good earnings from Amazon (AMZN), Microsoft (MSFT), Deckers Outdoor (DECK) and a few others, it is dead this morning. Speculative action has dried up and high-beta big-caps aren't moving much. MSFT and AMZN are driving up the Nasdaq but the other indices are flat and breadth is just slightly positive. Oil and retail are leading while biotech is lagging.

As I discussed in my opening post, I cut my long exposure quite a bit yesterday as the action in many individual stocks bothered me. I don't see any overt signs of problems in the indices but I'm acting on a gut instinct to be more defensive and stay selective with new buys.

The only new buy on my radar this morning is Cancer Genetics (CGIX), a small biotech that did a secondary offering at $14 a couple of days ago. The stock was hit hard after announcing the offering and probably was priced lower than management would have liked. It has obvious support and should work its way back up.

My two biggest long positions are Facebook (FB) and Sarepta (SRPT). I'd like to add to both but I don't see any reason to do so now. Hopefully, conditions will consolidate a bit and we'll see new setups develop.

Oct. 25, 2013 | 8:32 AM EDT

Not Calling a Top Yet

  • Trying to guess when can be costly.

The advantage of the emotions is that they lead us astray. --Oscar Wilde

Despite some very good earnings reports from Amazon (AMZN) and Microsoft (MSFT), we are heading for a mixed open this morning. Asian stocks were mostly lower on inflation reports out of Japan while Europe managed some small gains on earnings news.

The market continues to trend higher and to make new highs, but the action has been a bit more volatile lately. There also is some action in individual stocks that I find a bit worrisome. Given the technical action, there is little reason to be overtly negative but it can take some effort to maintain a bullish bias.

I find that one of my biggest challenges is to not let my desire for some pullbacks color the way I view this market. I suspect that there are many traders like me that have a bullish bias, but they grew weary of chasing stocks that go straight up. What they really want is some volatility so that they can trade like we used to in the old days, when the action would ebb and flow.

The most effective traders in the current environment tend to have a perma-bull attitude. In the past, this sort of attitude was a detriment to traders, even in uptrends where we would have some pullbacks and consolidation which would reward those who maintained a more flexible view. These days traders who are relentlessly bullish are never given easy access to the market.

I mentioned Thursday that I ended up doing quite a bit of selling. There really was no reason for that given the action in the indices, but there were too many individual stocks with action that didn't' impress me very much. The fraud allegations against NQ Mobile (NQ) and the sympathy moves in other Chinese names took some of the air out of the speculative action I've been playing. That probably impacted my overall market view as well.

I'm a little surprised we aren't seeing a stronger open, given the earnings reports Thursday night, but that may be a sign that we have already anticipated some pretty good news. I'm not going to call a top in this market or even proclaim that a topping process is starting. I am playing my positions very tightly, however, and I am inclined to look for reasons to lock in gains rather than to buy. If I find good setups that I like, I will pursue them but my inclination to chase things higher is very limited right now.

Trading isn't just about reading the charts and being bullish or bearish. We also have to deal with our own emotions and tendencies. I am struggling with my desire for this market to pull back and rest a bit. I am recognizing that my feelings are not objective or even well justified, so I'll try to suppress them and stay focused on the overall market action.

This market keeps plugging along and any doubts or worries have been a handicap. One day that won't be the case but trying to guess when is very costly. Good luck and go get 'em.

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