Trouble Is Brewing

 | Nov 06, 2013 | 4:10 PM EST
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Microsoft (MSFT) and Wal-Mart (WMT) led the DJIA up by triple digits today and the senior indices hovered around new highs, so this must be a great market. That is what you are likely to hear from the media. But if you actually trade stocks, it was a very poor day.

The most glaring problem was the pummeling of the biotechnology sector. This group has led the market for many months, but today it was pounded. Another group that has done very well this year is solar energy, and that was hit hard too. Many stocks in these groups are extended, but the market punished them all.

It wasn't just these two groups that suffered. Tesla (TSLA) weighed on the big-cap momentum names, and the small-cap indices were solid red. There were still quite a few new highs and breadth was slightly positive, but you sure didn't have to look hard to find nasty action.

So what does this mean? The bulls will just shrug and say it is healthy rotation into new leaders. But the stocks that are pushing the indices are not those that we typically see leading an uptrending market. When money flows into big-cap names like MSFT, WMT and Coca-Cola (KO), it is a sign that big funds are looking for safety as they try to stay heavily long. Leadership like this is not healthy and usually a sign of trouble brewing.

Whether the market is healthy depends on which stocks you watch, and the stocks I watched acted very poorly today. Folks who view the DJIA as the essence of the market may feel differently, but the action I saw today demands more caution, and that is what I'm going to do.

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

Nov. 06, 2013 | 2:40 PM EST

Lots of Landmines and Quick Reversals

  • This sort of chaotic action tends to occur during a transition.

The indices, particularly the DJIA, are covering up very chaotic action under the surface. The two groups that have led the market for quite a while -- biotechnology and solar energy -- are being hit hard. Also, momentum stocks such as Tesla (TSLA) and a number of China Internet names are under severe pressure.

Breadth is slightly negative but this market is littered with landmines and quick reversals. Traders still pushed nearly 300 stocks to new highs, but risk has increased substantially and chasing has not been working nearly as well.

This sort of chaotic action tends to occur when undergoing a transition. We aren't seeing it in the indices but it is painfully clear in individual stocks that the nature of the action is shifting. Generally, the indices catch up with the internals eventually, but they are doing a very good job of providing a false sense of security.

I've done little other than to build positions in BioTelemetry (BEAT) and Organovo (ONVO). I've taken a few stops here and there, but I'm sitting on cash and I don't feel the need to do too much right now.

I continue to be concerned that the Twitter IPO tomorrow may mark a significant turning point but, as always, I plan to react as things unfold, rather than be anticipatory.

Nov. 06, 2013 | 10:45 AM EST

Frisky, but Dangerous, Action

  • Manage your trades closely.

We have very frisky action this morning that seems driven mainly by strength in Europe and a weaker dollar. There isn't any major news in the U.S. but anticipation of the Twitter (TWTR) IPO and the refusal of the indices to pull back seem to be helping the mood.

Breadth is running quite nicely at a little less than 2:1 positive but the iShares Russell 2000 (IWM) is lagging and heading for flat. There's strength in energy, precious metals and regional banks while biotech and solar energy lag.

I don't like seeing that the relative weakness in small-caps and the strength in big-cap momentum names is limited, although they are ignoring Tesla's (TSLA) weakness for the most part. This has been a very tricky market lately with lots of reversals if you chase too aggressively.

I still am concerned about the health of the overall market but I'm staying focused on individual trades. BioTelemetry (BEAT), which I've mentioned many times, had a great quarter and it is up sharply. It has contract news that is helping and I believe it will continue to run.

Another stock I've been building this morning is Organovo (ONVO). I added this to Real Money's Beat Ideas list and will be looking to build the position as the chart develops. ONVO has very interesting potential, intriguing news, good numbers and the right buzzwords: "3-D" and "biotech."

This market is looking a bit dangerous, so make sure you manage trades closely. We had a good suck-in this morning and now the early buyers are seeing stops trigger.

Nov. 06, 2013 | 8:15 AM EST

State of Flux

  • The market has been undergoing a transition of some sort.

I think that the undecided could go one way or the other.

--George H. W. Bush

The indices have been churning for several days with little movement but are finding some traction this morning as we anticipate the Twitter (TWTR) IPO tomorrow, a possible interest rate cut in Europe Thursday, and the October jobs report Friday.

Earnings reports continue to roll in but are mostly from smaller, secondary stocks. Overall, they are mixed evenly between good and bad reactions. The most notable report is a disappointment from Tesla (TSLA), in large part due to very elevated expectations.

The market has been in a state of flux for over a week with the indices doing little. Sentiment has been shifting in momentum names and speculative small-caps, which has caused quite a bit of movement under the surface. After a drubbing last week, a number of the momentum names have acted better this week, but TSLA may cool off some of the hot money.

My overall impression lately is that the market has been undergoing a transition of some sort. It isn't smooth and it isn't certain, but the change in the action in individual stocks is indicative of a topping process. Every time we have seen some change in character this year, we seem to shrug it off and resume the upward trek, but this has been a bit more chaotic this time.

The bulls continue to be very unconcerned with the market action. Sentiment is extremely bullish and there is plenty of talk about positive seasonality into the end of the year. With so many big hedge funds underperforming, the hunt for relative performance and the tendency to chase high beta big-caps will likely occur.

While I've been more concerned about the market lately, mainly due to the underlying action, there still is nothing in the indices to suggest that we need to head for the hills. The easiest mistake to make this year is to be overly anticipatory about a market turn. If you have embraced that approach to the market, it has been extremely costly.

Although I'm skeptical that the indices can run much more, I don't want to be dogmatically bearish as there continues to be good trading action in individual stocks if you are selective. Too many market players take an "all or nothing" approach to the market, and they won't pursue good trades that are in the opposite direction of their overall market bias. Sometimes it is can be tough to shake off a strong market bias, but you need to work at it to make good money in an environment like this one.

We have a decent gap up this morning mainly due to the strength out of Europe, but I'm looking for choppy conditions to continue. The Twitter IPO is going to suck up a lot of oxygen and I'm concerned that it may provide some sort of short-term top.

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