A Whole Lot of Ugly

 | Nov 07, 2013 | 4:05 PM EST
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The warning signs I've been writing about for the past week proved prescient. The indices, which have been covering up much of the recent weakness, suffered their worst losses since Oct. 8. There was a whole lot of ugly out there and nothing to indicate that it can't continue.

The Twitter (TWTR) IPO went off without a hitch but even though it traded well, it still was a likely catalyst for much of the selling. The event had received so much attention it was difficult not to believe that it might be a sell-the-news event for the broader market, especially since so many stocks have already been showing signs of weakness.

The issue now is whether this is just another one of those selling squalls that will be quickly forgotten or the start of serious downside momentum. Many stocks have already been hit hard while others are now playing catch up.

With action like this, the best thing you can do is try to stay out of the way and protect capital. There will be plenty of bottom-calling, but the goal isn't to nail the exact moment the market bottoms but to buy when there is the best chance of sustained momentum.

Market players have generally come to expect quick recoveries and have forgotten what a correction feels like. I don't know how long this pressure will continue, but the prudent move is to play it safe with plenty of cash and wait for the price action to improve.

Don't forget that we have the monthly jobs report in the morning, which will likely jerk us around, but it could easily be an excuse for further selling. The bears have the advantage and its best not to fight them.

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

Nov. 07, 2013 | 12:39 PM EST

Twitter Is a Long-Term Story Stock

  • Wait to see if a trading range develops.

Is Twitter (TWTR) a buy or sell now that is trading about $20 over its IPO price?

There are plenty of folks looking at the numbers and almost all of them will tell you that it is very expensive, but that really has nothing to do with how this stock will perform. TWTR is going to run if the environment is right for momentum stocks. That is the only issue that really matters.

Fundamental analysis isn't going to help you much with TWTR. This is a stock that will trade primarily on technicals. It is long-term story stock like Google (GOOG), Tesla (TSLA) and many others when they first started trading. The numbers are great for debates, but what matters most is simple supply and demand.

If TWTR had IPO'd a couple months ago when names like Facebook (FB), Netflix (NFLX) and LinkedIn (LNKD) were running hot and heavy, it would probably perform much better. The DJIA may be at a high, but the inclination to chase stories has dropped significantly.

Keep TWTR on your radar screen and wait to see if a trading range develops.  Once you have some support and resistance levels, it will be pretty clear whether market players are willing to play the momentum game with it.

I think it is likely that TWTR will be trading higher at some point before the end of the year, but there is no reason to rush in right now. It has to develop underlying support first and that may take a while, especially if the high-momentum names remain under pressure.


Nov. 7, 2013 | 10:52 AM EDT

Selling Takes Hold

  • But this sort of shakeup was needed

While the indices are down this morning, they still aren't doing a very good job of reflecting how poor the action is in individual stocks. The high-momentum names are being brutalized again as many are now cracking important support levels. Small-caps are seeing bids dry up and dip-buyers are standing aside.

My concern the last few days was that we were setting up for a market-wide sell-the-news event when the Twitter (TWTR) IPO hits. We had frothy market sentiment, endless hype in the media and lots of troubling action hidden by the indices. The only problem was that it was almost too obvious, but the spike in the Dow yesterday was just too much and now the selling is hitting hard.

I've taken some stops this morning and I am staying defensive. The good news is that we need this sort of shakeup to give us a new crop of opportunities down the road. The important thing is that you protect capital while we wait patiently for better action to develop.

Nov. 07, 2013 | 8:12 AM EST 

I Spy a Topping Process

  • The key word is 'process' -- but do be more cautious.

Life is pleasant. Death is peaceful. It's the transition that's troublesome.

--Isaac Asimov

Market indices, like the Dow and the S&P 500, are supposed to provide us with a shorthand way of discerning the health of the market. Generally they do a fairly good job of it: When they are strong and hitting new highs, we can be pretty comfortable that the market is in good shape. However, there are times when they don't do a very good job of telling us what is really going on. Now is one of those times.

For more than a week now, there has been a major disconnect between the action in the big-chip averages and the movement of high-momentum stocks and speculative small-caps. On Wednesday it was particularly pronounced amid the slaughter of previously leading groups biotechnology and solar energy. In addition, leading momentum stocks suffered again.

One list of 20 leading momentum stocks -- which included names such as Facebook (FB), Google (GOOG), Netflix (NFLX), Qihoo (QIHU), Yelp (YELP) and Tesla (TSLA) -- was collectively down nearly 4% yesterday. Given that the Dow was up 0.82%, it is an understatement to say that there were some negative divergences.

So what does this mean? Obviously we have some big-cap names like Microsoft (MSFT), General Electric (GE) and Procter & Gamble (PG) doing quite well. Isn't this just healthy rotation into some key names that may represent better values than the overheated momentum stocks?

That is the bullish argument, but typically it just doesn't work that way. Big, conservative stocks aren't normally leaders, because they generally move slowly and are used when funds are defensive and need to park cash some place. People don't buy Microsoft and GE because they think they are going to lead the market higher. They buy stocks like these because they don't see other alternative, and they want to be in something that may be viewed as conservative and safe.

My conclusion from this odd action over the past week is that the market is undergoing a topping process. The key word here is "process." Markets don't usually reverse and go straight down. It takes a while for a top to form and play out. In fact, in the early stages of a top, you won't even see it reflected in the indices very much -- and that is exactly what we have happening right now.

Indices at their highs don't fall apart and go straight down. They churn and chop, and the internal action weakens, as sentiment slowly shifts and market players make adjustments. It is very likely there will be some strong days as the topping process plays out.

I'll change my mind about a topping process if the action shifts. But, right now, the very poor action in key leadership stocks, the weakness in speculative small-caps and the move to more defensive names all constitute signals that we should be more cautious.

One thing that will be of particular interest today is the action in the Twitter (TWTR) initial public offering. There is tremendous hype here, but quite a few cautious comments as well. This event has the potential to be a catalyst for a change in market character that has already starting to take place. If the Twitter-related excitement dies down quickly, it is going to be a problem. Positive sentiment is at very high levels, and it will be tough to sustain it if we don't witness speculative excitement.

I'm cautious but opportunistic, and I'll continue to look from trades like Organovo (ONVO) and BioTelemetry (BEAT), which worked well Wednesday. We're dealing with a very peculiar market right now, and it demands heightened vigilance.

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