A Sneaky Rally

 | Nov 13, 2013 | 4:27 PM EST
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The most consistent thing about this market lately has been its inconsistency. Today it was the bulls' turn to take control and they did a very nice job with a sneaky rally that gained strength steadily all day. After gapping down to start the day, the dip-buyers jumped in and gave way to the chasers who kept pushing.

Volume wasn't anything special and breadth was only about 2-to-1 positive, but, technically, it is a classic break out of consolidation. As I've been discussing, the indices have been churning for a while and that actually helped to give us a pretty good foundation to move higher.

The bulls are going to be talking a lot about this breakout move. All year long we see moves like this that don't have a lot of obvious power but they build further momentum as shorts are forced to cover again and the underinvested bulls have to chase.

Despite the good action, it was not easy to put new money to work unless you chased aggressively. But that has been the right move this year, more often than not.

As I mentioned earlier, there has already been talk of a melt-up move to end the year. The action today is going to give the bulls some ammunition for that scenario.

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

Nov. 13, 2013 | 12:51 PM EST

Don't Rule Out the Optimists

  • Stay flexible enough to adapt if a big run starts to develop.

On Monday, there were good pockets of trading action, on Tuesday things traded poorly, today the hot money is busy chasing once again, and on all three days the indices did nothing. That is the sort of market environment we are in right now. We have major mood swings under the surface, and the indices don't reflect what is really happening.

Although this action doesnt provide much clarity, I keep hearing traders present very bullish scenarios into the end of the year. There is talk about melt-ups and parabolic moves, and it isn't hard to understand the logic. Plenty of folks have negative macro views and want to see things roll over, but there are also some very desperate longs who want to make up relative performance and jump in and buy whenever they can. We saw them jump in quickly this morning when we gapped down.

I don't try to make big, bold market predictions, but I do try to keep an open mind. I won't rule out the possibility of a big run over the next six weeks. In fact, I want to make sure I'm flexible enough to embrace that sort of action if it does start to develop.

The indices have been consolidating for a while now, and as I wrote in my opening post, the big issue is whether this is topping or the building of a foundation for a move higher. Seasonality favors the bulls, especially since so many need strong performance to close out the year.

There is no reason to be a wild bull right now, since the market is acting very choppy and random, but we need to be ready to be much more positive if this melt-up talk does start to take hold. I don't much trust those types of predictions, but it can't be dismissed, given the current technical patterns.

Nov. 13, 2013 | 10:29 AM EST

Don't Get Burned

  • Many stocks are moving around randomly.

A strong bounce followed the gap-down open but breadth is running nearly 2-to-1 negative. Trading is choppy and sloppy again but with a slightly bullish bias. The action is tricky because some stocks are still making new highs, like Gogo (GOGO) and E-House China Holdings (EJ), and solar energy is active, but many stocks are moving around randomly. The number of new lows has been increasing, and if you aren't careful with your stock selection, it is very easy to get burned.

The challenge is that conditions aren't weak enough to be aggressive with shorts or strong enough to justify chasing. Some stocks, like Organovo (ONVO), act as if nothing is wrong, but then you look at Twitter (TWTR) and Facebook (FB) and it doesn't look healthy at all.

I don't have any strong market bias right, which means that I stay selective and do a lot of short-term day trading. For example, I'm fooling with FAB Universal (FU) this morning following a good earnings report. It has made a big move in the past and I believe it could generate momentum again if it can stay above $7. Recon Technology (RCON) is a Chinese fracking play that is on my radar as well.

It isn't a very interesting market, but there are a few trades to be had if you dig. Just don't be too trusting of the overall action.

Nov. 13, 2013 | 7:17 AM EST

A Thoroughly Mixed Bag

  • The market action has been teasing both bulls and bears lately.

If I look confused it is because I am thinking.

--Samuel Goldwyn

Is this a consolidation of gains before a run into the end of the year, or is it a topping process? That is the question we ponder as the major market indices do little while underlying stocks trade in choppy and sloppy fashion.

The market action has been teasing both bulls and bears lately. There are both negatives and positives, but there's not much clarity -- the indices haven't been giving us many clues. What makes things even more challenging, however, is that the action in underlying stocks has been very inconsistent. One day we'll have some good momentum and speculative moves, and then the next we'll start seeing cracks in the action.

What I've found most troubling lately has been the lack of good leadership. Strong markets typically have some key stocks with good relative strength. We saw it earlier this year when the Four Horseman -- Facebook (FB), LinkedIn (LNKD), Netflix (NFLX) and Tesla (TSLA) -- were leading the charge. Even when the indices were weak in August, these four remained strong and helped to lead many momentum stocks higher.

Recently we have seen some relative strength in solar energy and 3-D printing names, but momentum has been quite narrow. Overall, it's tough to pinpoint a small group of stocks that would qualify as key market leaders. New leadership may eventually emerge, but right now it is a muddled mess.

The bears continue to make the same arguments that they have engaged in for much of the year, and they are becoming more shrill about the likelihood that the Federal Reserve will soon begin to taper off bond-buying. The market seemed to have shrugged this off last Friday amid the better-than-expected jobs news, but the issue will nonetheless have an impact on the market going forward.

On a technical basis, the bulls are in good shape right now, and the indices have not done anything wrong. That said, the underlying action has been difficult. We are going into the seasonally strongest time of the year, and there is great pressure on money managers to produce some relative performance.

The big question in mind is whether the bears can use the uncertainty about the big economic picture to put pressure on this market. We're seeing interest rates rising, but still few signs of real economic growth. As Roger Arnold points out, the reason that the U.S. has a falling unemployment rate is that so many people continue to drop out of the work force.

As usual, I will not attempt to predict which way the market will break. Instead, my position is to wait for things to develop, and then to react quickly. I've raised quite a bit of cash, and I am making few new buys lately, as there just isn't much that meets my requirements. Sooner or later the action will shift in one direction or the other, and at that point we'll have the ability to be more aggressive -- but, for now, the best course of action is to be patient and watchful.

We're looking another slow start Wednesday morning as European bourses see some pressure on news that the Bank of England may raise rates sooner than previously expected.

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