The Momentum Stocks Falter

 | Oct 30, 2013 | 4:29 PM EDT
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Even though the indices finally pulled back a bit, they still managed to cover up ugly action under the surface. Breadth ran about 1,550 gainers to 4,000 losers but the big-cap momentum stocks continued to struggle and the small-cap indices took a hit as well. The iShares Russell 2000 (IWM) was only down 1.35% but that was enough to wipe out nearly nine days of gains.

The Fed decision was unsurprising and gave us a little "sell the news" action, but dip-buyers didn't let things fall too far before they jumped in and that cut losses going into the close. The Fed is obviously on hold for a while but it isn't likely to be the driving force for the bulls that it once was.

Facebook (FB), which is probably the most important earning report of the season, just put up very strong numbers and is surging to a new high. This should help the momentum sector a bit but there is damage that needs to be repaired. FB is going to be the momentum king now and I expect it will be heading for $60 quickly. I added a bit on the news.

Overall, the market has been challenging lately and I'm not sure FB can fix it singlehandedly. I have plenty of cash on hand and I am going to take my time putting it to work.

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

Oct. 30, 2013 | 1:24 PM EDT

The Cracks Are Showing

  • All the negatives are lining up.

The good news is the market action is making more sense. The bad news is all the negatives are aligning.

My concern lately has been that the weak action in leading stocks was an indication that the broader indices would start struggling. They have held up well the last couple of days as money moved into defensive plays, but today we are finally starting to see cracks in the action. The small-caps in particular are struggling as breadth continues to decline.

We have the Fed interest rate announcement coming up shortly, which is going to determine where we go from here; however, I am concerned that the market has already priced in a tapering delay. It is very unlikely we will see any specifics as far as timing, so there really should be nothing much new from the Fed. They will point out the weakness in recent data and may comment on the fallout from the government shutdown, but we know the economy has been weakening and tapering has been off until the spring.

The market seems inclined to look for reasons to sell off and I'll be hesitant to trust an upside move on the Fed news, especially if there is nothing new in the policy statement.

Oct. 30, 2013 | 10:37 AM EDT

Inconsistency Rules This Market

  • The indices plod higher while leading stocks struggle.

I've been complaining about the market action for days, and nothing this morning is helping me feel better about it. The indices continue to plod higher while breadth under the surface is negative and leading stocks continue to struggle.

A couple of months ago I wrote about the stocks that I called the "Four Horsemen." They were Tesla (TSLA), Facebook (FB), LinkedIn (LNKD) and Netflix (NFLX). These stocks were leading the very strong momentum in the market for quite a while but all four have been acting poorly for a couple of weeks. Despite the loss of that leadership, the indices have continued to trend higher with hardly a pause.

That inconsistency is at the heart of my struggles with the market. Quite often there will be a rotation of money from one group into another but, generally, when key momentum stocks falter, the indices falter as well.

My gut feeling is that the struggles of the momentum names indicate that the indices are likely to form a top soon. It is possible that the leading names will regroup and regain their momentum, but I don't think that can happen until the indices have some sort of shakeout.

I don't like this market action and I've moved heavily into cash. Maybe I'm just not understanding the market dynamics right now but I until I have greater clarity I'm going to move slowly and keep exposure light.

Oct. 30, 2013 | 8:08 AM EDT

Staying on the Defensive for Now

  • That's what individual stocks are telling me to do.

Conflicting evidence is incompatible with a conclusion. --Thomas W. Jones

I've often written that momentum in the market tends to last longer than what seems reasonable. That is one of the main reasons I avoid trying to call market turns, as so many pundits love to do.

Another issue I've often discussed is how it's more important to pay attention to key leading stocks than it is to focus on the major indices. The averages aren't always such great indicators of overall market health. What matters most is the action in the stocks you hold. When they act poorly, that is the signal that you should act.

Those two concepts have been conflicting recently: The indices have continued trending straight up and have shown no signs of stopping, yet many individual stocks have been struggling. Most notable about the action has been that, despite the new highs in the indices, the key leadership stocks have struggled along with the speculative names. Money has shifted into defensive names, which are driving the indices, but there has been a major shift in the action.

The best traders feel as if they are in tune with the market action, but that has been hard to sustain, as the stocks that have been working best for many months are now struggling. That wouldn't be an issue if the indices were rolling over, but they actually continue to look quite healthy. To put it simply, leading stocks are not confirming the overall market strength.

Because of this, I've been hearing more complaints from traders in the last few days than I've heard in quite a while. They took defensive steps, as their individual stocks demanded, but then they've underperformed as the indices have continued running.

The best remedy for this difficulty is to be aware of what is going on, to refrain from forcing trades and to stay focused. In this way you can regain your sense for what is happening. I've been trading quite small the last few days as I've wrestled with the weakness under the surface -- but I'm confident that, in a day or two, I'll have a better feel once again.

The Federal Reserve interest-rate decision is due Wednesday at 2 p.m. EDT, and that is going to be the market's main focus. Many of the headlines have attributed the market strength to the belief -- which has been widely held since the government shutdown -- that the Fed will continue its $85-billion-a-month bond-buying program until at least March or April of next year.

The Fed decision already seems well-anticipated, but one thing we all know about this market is that betting on a "sell-the-news" reaction to obvious news doesn't work very well. Anyone who tried that strategy following the government shutdown suffered badly.

Meanwhile, earnings reports are mixed Wednesday: Baidu (BIDU) and Buffalo Wild Wings (BWLD) came in very strong, while LinkedIn (LNKD) and Yelp (YELP) didn't do so well. Facebook's (FB) report, due tonight, will be very important, and it should set the tone for big-cap momentum names going forward.

Look for choppy action into the Fed announcement, and then some fireworks, even though there are unlikely to be any big surprises. I'm staying focused on individual stocks, and right now they are telling me to be defensive.



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