Heed the Warning Signs

 | Oct 31, 2013 | 4:21 PM EDT
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The indices finished in the red and breadth was negative but there was improvement in the underlying action. Facebook (FB) bounced back from a poor open, a few other momentum stocks bounced, and some small-caps that have been hit lately found support. Nothing to get too excited about but at least there was subtle buying interest in places.

But the weak close is a negative indication that illustrates a hesitance to hold overnight. The conventional wisdom is that the smart money tends to act at the close while the retail investor acts at the open. Thus, a strong open and weak close is a warning sign.

Because of the recent weakness in leadership stocks, my view is that we are undergoing a topping process. The indices still have don't much wrong but the internal action has been poor for about a week and the weakness of the bounce attempt today doesn't give me much comfort.

The market has suddenly forgotten the negatives and taken off to the upside more than once this year but it must prove itself before I start putting more money to work. We aren't in a downtrend, but warning signs continue.

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

Oct. 31, 2013 | 1:24 PM EDT

Getting Nervous

  • The collapse of momentum stocks has affected the mindset of traders.

They aren't overly aggressive, but the dip-buyers, particularly in Facebook (FB), are drawing in more buyers and providing support. Breadth is still solidly negative but most of the momentum plays are inching up and there are signs of bottom-fishing in the stocks that have been hit hardest lately.

Typically, once the market started one of these slow bounces this year it kept on building but it suffered quite a bit of damage under the surface and I suspect the buyers may be a bit slower this time. They definitely aren't ready to give up but there is nervousness over how extended the markets still is, and the collapse of momentum stocks has affected the mindset of many of the traders who were aggressively chasing anything they could a week or two ago.

The recovery in FB is a good sign and that is helping some other names but I'm doubtful it is clear sailing. On the other hand, quite a few stocks have already undergone severe pullbacks and as support levels develop, that should help the action.

Other than trading FB, I continue to do very little. I'll look for potential buys into the close but my feeling is that the indices have further downside in the near term.

Oct. 31, 2013 | 10:42 AM EDT

Market Weakness Unmasked

  • What lies beneath this action.

Market struggles continue as momentum stocks fail to regain their footing and small-caps see bids disappear.

Facebook (FB) was the key to the momentum names and it failed to deliver. In fact, it sprung an ugly trap on traders who bought the headlines and were surprised by a very downbeat conference call. The day-traders are bouncing FB around but these are flippers and not long-term investors.

Breadth is poor at around 2:1 negative and other than minor strength in chips and oil, all major groups are red. Former leading groups -- biotechnology and solar -- continue to see aggressive selling.

I'm in defensive mode, which means heavy cash levels and short-term scalping -- if I trade at all. The big problem is that the indices haven't really reflected the underlying weakness very well but are now starting to catch up slowly. It may take a while for this to unwind and with the Fed back on the sidelines and earnings season winding down, there aren't many potential positive catalysts.

Oct. 31, 2013 | 7:58 AM EDT

Witches' Brew

  • The recent action is a bit spooky.

Eye of newt and toe of frog,
Wool of bat and tongue of dog,
Adder's fork and blind-worm's sting,
Lizard's leg and owlet's wing,
For a charm of powerful trouble,
Like a hell-broth boil and bubble.

-- William Shakespeare, Macbeth (Act IV, Scene I)

The market doesn't seem to realize it fully, but we have a witches' brew of problems bubbling up lately. On Wednesday, it became a little more evident that there are some issues, as we had a slights sell-the-news reaction to the unsurprising FOMC interest rate announcement. Despite some red in the indices, the very poor action in a slew of stocks continues to be hidden from view.

The weak action in momentum stocks and speculative small-caps, particularly China names, began last Friday and has continued to trouble traders, who are seeing some of their favorite names pull back sharply. The media are mostly oblivious to the damage that is being done, as they focus on the irrelevant DJIA and stodgy defensive stocks that are helping to hold up the indices.

Yesterday, key momentum names such as Yelp (YELP), SodaStream (SODA), Questcor Pharmaceuticals (QCOR) and LinkedIn (LNKD) reacted poorly to fairly good reports, and selling pressure continues to build on other recent leaders such as Tesla (TSLA). The two hottest groups in the market for most of the summer were biotechnology and solar energy, and both are now littered with landmines.

Facebook's (FB) earnings report, which is probably the most important of the quarter, looked like a blowout when the numbers first hit last night, but comments about the inability to grow ad sales aggressively and the loss of young teen subscribers trapped chasers who bought the initial headlines. The stock is trading up this morning, but analysts are a bit cautious after the conference call comments.

The action in Facebook today will be a very important indicator of the health of momentum. If the stock does not hold its gains, it bodes very poorly for the hot money that is still hoping that the big-cap momentum names are just undergoing a slight pause before they regain their footing.

My big concern is that this poor action in momentum stocks and speculative small-caps is a major change in character and an indication of a topping process. We are heading into the best time of the year seasonally, and there continues to be a very high level of bullishness, but we simply can't ignore the weak price action in so many individual stocks.

For years the Fed was what prevented any sustained downside in this market, but there is now talk that tapering will occur sooner or later. There were even comments yesterday that the Fed's economic analysis was upbeat enough to suggest that it may not delay tapering as long as many market players hope it will.

We have a bit more selling pressure this morning, and I'm feeling a bit spooked by the recent action. Be careful --there are dangers lurking, and they may intensify before they disappear.

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