Chaotic Under the Surface

 | Oct 29, 2013 | 4:25 PM EDT
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The dip-buyers showed up this afternoon and bounced some of the high-momentum names and, of course, the machines had a late buy program that produced another new high for the indices. But it has been an odd few days as leadership has shifted to defensive stocks and profit-taking hits some of the old leaders.

There are still no signs of weakness in the indices but it has been extremely chaotic under the surface. Many traders, including me, are feeling out of sync with this action. It looks and feels like the market is undergoing some change in character but it isn't clear what it is going to be. The bulls are calling it a rotation into new leaders while the bears are saying it's a sign of top.

The Fed's interest rate decision tomorrow should provide a catalyst of some sort and maybe that will give us a little clarity. While I don't like to anticipate the end of a trend, I'm having difficulty staying with this one as individual stocks seem to be diverging from the indices. There is nothing much we can do about it but wait and see how things shake out.

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

Oct. 29, 2013 | 1:55 PM EDT

The Action Feels Narrow and Forced

  • Recent speculative excitement has dried up.

Quite a few momentum names have come back from early selling pressure, but this market action remains challenging. Even though the Dow industrials are sitting on an 80-point gain, breadth is running about even and volume has been slowly contracting. A number of traders have commented that the action feels narrow and forced. The trading action has dried up and the speculative excitement we enjoyed in recent weeks has pretty much disappeared.

The big challenge is that the indices are still running and it has been downright foolish to try to short them, even though the action under the surface has clearly degenerated. Maybe it's the machines manipulating the indices, but even with plenty of poor action there is little interest on the short side.

Over the last three days all the main stocks that were leading have stumbled, but there has not been any new leadership. There is buying in defensive names like Clorox (CLX) and Bristol-Myers (BMY), but momentum stocks like these don't lead to a broader market. In fact, when leadership is in defensive names, things tend to become narrower.

I'm bored by this action and I would like to be doing more, but nothing's showing up on my screens. That is the nature of trading, and the best thing to do is to accept it.

Oct. 29, 2013 | 10:33 AM EDT

Stay Small, Stay Fast

  • And don't force trades out of boredom.

The indices are in positive territory again, but momentum stocks are stumbling for a third straight day and speculative trading has dried up. I'm seeing lots of random action and very little sustained strength. It is a very different feeling than just a week ago, although the indices aren't reflecting that at all.

The market's reaction to Apple's (AAPL) earnings is a good example of the lack of sustained momentum. It had a very small gap-up following its report and is now down slightly -- one of the least-volatile reactions to its report in a long time.

Momentum names like Tesla (TSLA), LinkedIn (LNKD), Netflix (NFLX) and Facebook (FB) continue to struggle. While there are a few bounces in oversold solar and China names, they do not look trustworthy.

I've raised a good amount of cash the last few days and I just don't see anything I'm in a rush to buy. We are in one of those environments where we need to stay patient and be watchful. The biggest danger is forcing trades out of boredom. If you are looking for something to do, make sure you keep it small and fast.

Oct. 29, 2013 | 7:33 AM EDT

Tough Transition

  • The market is undergoing vicious rotation out of momentum stocks and into defensive names.

Three things cannot be long hidden: the sun, the moon and the truth.

-- Buddha

You wouldn't know it from looking at the indices, but for two days now, the market has been undergoing a very vicious rotation out of momentum and speculative stocks and into defensive and conservative names. Recent leaders have been hit hard, and speculative Chinese plays have been destroyed while money flows into stodgy names such as General Electric (GE), Procter & Gamble (PG), Alcoa (AA), PepsiCo (PEP) and United Parcel Service (UPS).

The big issue is whether this transition is a healthy development that will allow the indices to continue to trend higher or is an indication that a top is forming and struggle lies ahead.

Typically, strong markets are not led for long by value and defensive names. Those are places where investors look to park money as they protect gains. It is possible that this rotation is just a resting period and that momentum will resume after some consolidation, but it is a warning sign and requires some defensive steps -- especially if you have been playing the leading stocks in the market.

Earnings continue to roll in this week, with the Apple (AAPL) report not generating much of a response after a minor pullback last night. We have more big reports tonight from the likes of LinkedIn (LNKD) and Baidu (BIDU) that can impact the momentum names, but it is going to take some upbeat reports to stir up momentum again.

The other big potential catalyst we have on the agenda is the FOMC interest rate decision, which is due this afternoon at 2:15 p.m. EDT. The government shutdown and the tepid economic reports have eased concerns about tapering the Fed's bond buying, but that issue will be sliced and diced again this afternoon as we await the policy statement. Any hint that tapering is coming sooner or later is not likely to be greeted well.

The dilemma of this market is that there really is nothing wrong with the indices right now. They have paused slightly, which is healthy action after the run since mid-October, but it has been extremely chaotic under the surface. If you have been riding the recent market leaders and winners you, likely took some hits over the past few days. It was offset by positive action in a totally different group of stocks that hot-money traders generally don't favor, so it has been a very tough transition for most market players.

When the leading momentum stocks start to struggle, I raise cash rather than try to rotate into more defensive names. Typically, the moves in these more conservative names does not persist for long, and either the entire market starts to rollover or the momentum names come back to life. If we have some very strong earnings from the likes of LinkedIn, Baidu, Facebook (FB) and so on, we may see a resumption of the uptrends, but right now, the burden of proof lies on the bulls.

It is a very tricky market right now, especially since the indices are not reflecting what is really happening. Stay on guard, and make sure you manage positions carefully.

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