Look Beyond the Indices

 | Nov 05, 2013 | 4:43 PM EST
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The indices continue to be little help in navigating this market lately They are trading in narrow ranges and aren't doing a very good job of reflecting the underlying action. The indices did almost nothing today, but there continues to be some aggressive trading action in places. Breadth was poor, particularly on the NYSE, but more than 250 stocks made new highs, and some of the momentum names, such as Facebook (FB), Yelp (YELP) and Chipotle Mexican Grill (CMG), were active again.

The Tesla Motors (TSLA) report after the close wasn't strong enough for the momentum players, and it is being sold aggressively now. It's a good example of selling the news after expectations moved a little too high. The bigger question now is whether Tesla is going to affect other high momentum names. There aren't many that are close to their highs, and you can already see how Tesla is affecting SolarCity (SCTY) after hours.

Tomorrow we will have the build-up into the Twitter IPO, and I am concerned that this may give us a short-term top. Expectations are extremely high and market sentiment is so bullish now that it is tough to not think in contrarian terms. I'm not a big fan of contrary indicators, as they generally don't allow for precise timing, but with this action in Tesla and the talk that Twitter will go to $50-$60 or higher, I'm starting to think that the dynamics may favor some selling pressure

For the past week, the market has been trading quite differently than it has for most of the year. My feeling is that further upside will be limited at this point and we need to be a bit more defensive. Have a good evening. I'll see you tomorrow.

Nov. 05, 2013 | 12:55 PM EST

Never Mind the Bubble Talk

  • Some pundits want the glory of making a big call.

Is there anything more ridiculous and unhelpful than the constant talk about "bubbles" in the media? Back in 1999 and 2000, when we had a real bubble, there was very little talk about it. These days the biggest bubble of all is talk about bubbles.

Bubble talk is a disservice to market players. It is always premature, and it pushes folks to the sidelines too early. Even worse, it assumes that folks who stick with the market will be incapable of selling as warning signs build. It wasn't difficult to escape the market in 2000 as it started to break down. It took many months for the reversal to play out, and if you were disciplined and cut losses quickly, you were light years ahead of the folks who fought the strength.

Bubble talk is driven primarily by market pundits who want the glory of making the big call. Unfortunately, those who succeed in doing this are the ones who simply repeat the same prediction over and over and count on no one recalling how bad their timing really was.

Is there a bubble in the market? I sure don't see it. I suspect that there are just a lot of folks who are upset that the market ran away without them, and they feel better about it when they label the action as being irrational enough to form a bubble.

My advice is to ignore the bubble talk. Watch your positions closely and stay disciplined when it comes to cutting stocks that act poorly. You don't need to put a label on the market to trade it, and calling it a bubble is more likely to mislead you than help you.

Nov. 05, 2013 | 10:57 AM EST

Finger on the Eject Button

  • I continue to be concerned about price action in individual stocks.

Monday's action turned out to bit of a bull trap. Virtually all the momentum names that bounced yesterday are down today, with the turn in Tesla (TSLA) being particularly ugly. Market breadth is poor with just 1,300 gainers to 3,850 losers and all major sectors are in the red except for solar energy.

I am concerned about the way the market is setting up going into earnings from TSLA and the Twitter IPO. They are obvious sell-the-news events, but with the way momentum names and speculative stocks have been acting lately, the inclination to sell into strength is likely to be strong.

I continue to be concerned about the price action in individual stocks, which is not being reflected in the indices. My game plan is to keep my finger on the eject button but keep trying to knock out trades in China Sunergy (CSUN), Recon Technology (RCON), SolarCity (SCTY), Voxeljet (VJET) and others.

As I discussed in my weekend column, I believe Facebook (FB) may be a good play on the TWTR IPO and I am looking to build a position into that event. It is already perking up after a gap-down open, and it could run into the TWTR event on Wednesday night.

Nov. 05, 2013 | 7:40 AM EST

Trader, Don't Be a Hero

  • Be prepared for weakness, but also prepared to shift.

While it is all very well to talk of 'turning points,' one can surely only recognize such moments in retrospect. Naturally, when one looks back to such instances today, they may indeed take the appearance of being crucial, precious moments in one's life; but of course, at the time, this was not the impression one had.

-- Kazuo Ishiguro, The Remains of the Day

For a little over a week now the market has been showing signs that it is undergoing a topping process. We had a respite yesterday with good breadth and positive action, but it was fairly mild and is almost fully reversed in the very early going this morning.

As I've often discussed, my approach to the market is not to be overly anticipatory, but to react as conditions change.  I've found that it generally pays off to stay with the existing trend as long as possible, rather than give into the temptation to make big market timing calls. 

The key to a reactive approach to the market is to pay close attention to the price action. Price action isn't simply the behavior of the indices. The indices are often quite misleading. Back starting in mid-September, for example, the indices acted poorly while many leading stocks continue to trend up. Recently, we have had the opposite situation where leading stocks are doing poorly while the indices continue to hold up well.

Because of this change in the price action of many individual stocks that I follow, I have been reacting and taking a more defensive view of the market. Being defensive and more cautious doesn't mean being dogmatically bearish like so many of the folks who are constantly trying to call a top. What it means is being mentally and psychologically prepared for weakness, but if it doesn't develop more fully then being able to shift back to a more positive view.

My concern this week is that the Twitter IPO on Wednesday night may end up being an ideal catalyst for further topping. It is wildly anticipated and there are already some substantial questions about how it stacks up on a valuation basis compared to Facebook (FB). I suspect that many funds will be looking to fade any Twitter-induced euphoria, but we'll have to wait and see.

What is so difficult about this market is that all year long it has been a mistake to be defensive. We have consistently come back very quickly from any pullbacks and the bearish arguments are consistently ignored.

One thing that is changing lately is that market players don't seem to be counting on the Fed for the same level of support, but they aren't very worried about tapering so far either. We also are heading into the strongest time of the year seasonally, with many fund managers looking for relative performance. The dip buyers have been out there all year and they showed up again yesterday.

There are warnings signs, but there are also good trading opportunities like SolarCity (SCTY), which blasted higher yesterday. Stay watchful and be on guard, but continue to let the price action be your guide. 

Our goal isn't to be the hero who calls the exact moment that the market tops. Our goal should be to maximize our gains for as long as possible.



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