At a Loss

 | Nov 19, 2013 | 4:23 PM EST
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The DJIA and the S&P 500 are supposed to be quick and easy ways to measure the health of the broader market. The DJIA, in particular, has major design flaws but there is usually some correlation between the major indices and the underlying action. Unfortunately, that has not been the case lately.

Today was particularly misleading as the DJIA closed near flat but breadth was more than 2:1 negative and an index of high momentum stocks fell more than 2%. Small-caps were clipped for a loss of 0.5%, but that doesn't do a very good job of reflecting the ugly action.

The action in individual stocks matters most to me, and when there's such severe negative non-confirmation of the indices I quickly become cautious. The indices have been misleading for a while, and the likelihood is that they will eventually catch up with the leadership stocks that are now seeing a severe correction.

The media still celebrates the indices, but smart traders who are watching the action in key stocks and sectors are raising cash and becoming more defensive. If you wait for the indices to reflect what is really going on, it will be too late to avoid major losses.

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

Nov. 19, 2013 | 1:39 PM EST

Downright Disgusted

  • This sort of malaise doesn't produce a lot of market movement.

The indices are only slightly negative but breadth is about three losers for every two gainers and there isn't any momentum. Sometimes a flat market can produce good trading as the hot money gravitates toward a small group of stocks, but that isn't happening today. We just have a general lack of interest and that is creating slippery action in the momentum and speculative names.

Probably the most difficult market to trade is one with a slow drip lower but no real panic or strong emotion. The main emotion I'm seeing is disgust rather than fear or panic. Unfortunately, that sort of malaise doesn't produce a lot of movement. Strong emotions lead to big swings, and we don't have that to play with now.

Market players too often make the mistake of thinking they have to be doing something all the time. There are environments where doing very little is your best move and that sure feels like the situation now. I don't like this action and I'm going to stand aside and let it play out. I see no reason to believe that the selling is nearly finished.

Nov. 19, 2013 | 10:59 AM EST

Trust Is Low

  • I'm gun shy after yesterday afternoon's reverse.

The dip-buyers didn't waste any time taking advantage of the soft open, but the big issue now is whether they have the juice to keep pushing. The challenge of this market lately has been the lack of sustained momentum. There isn't much selling pressure other than yesterday afternoon, but leadership has been very messy and most of the liquid momentum names are not trading at highs.

I'm gun shy after yesterday afternoon's reverse and I don't have an inclination to chase this bounce. My trust is low and I don't see a compelling reason to add to favorite positions. My biggest concern isn't bad price action but whether this price action can be sustained. Market players look skittish and I don't think they are going to keep pressing after this morning's bounce.

I'm eager to see stocks reset, so maybe my hope has colored my thinking, but I continue to find it very difficult to find charts that I want to load up. I've been complaining about the lack of setups ever since the indices broke out to new highs last week and that continues to be my biggest problem with this market.

I started a small position in Horizon Pharma (HZNP), a small-cap biotechnology company that I will add to. Other than that, I'm doing little.

Nov. 19, 2013 | 8:00 AM EST

With a Finger on the Eject Button

  • Momentum stocks' quick reversal Monday was a sign of nervousness.

It has been one the most hated rallies in equities in history.

--Carl Ichan

Even as the mainstream media was breathless with excitement over another all-time high for the indices Monday, some warning signs were bubbling up under the surface.

Although the action in individual stocks has been a bit mixed, the averages have been chugging along, becoming more and more extended, even as both bears and underinvested bulls have looked for a little rest. Then finally, Monday afternoon Carl Ichan voiced some concerns about the market -- and that triggered some fast selling, particularly in the high-momentum names.

Icahn really didn't say anything very profound. He simply voiced a concern about the market that has been shared by many others, and it provided a good excuse for some selling. Even the bulls tend to agree that the market has been a bit frothy recently and could use a rest.

Throughout the year I've pointed out many times how little joy the rallies have seemed to produce. The media will do high-fives and act as if everyone is celebrating, but the reality is that many bulls have never been able to fully embrace this market run. They are chronically underinvested, and they don't ever seem to be able to put their cash fully to work.

This disdain for the market strength has produced a huge supply of dip-buyers who have kept a constant bid under the market. They never seem to find the entries they like, so they hold their noses and buy even though they really want pullbacks. I suspect even Carl Ichan has felt that way quite often, even though he is having a very good year.

So was Monday's reversal action a sign of a top? It is premature to jump to that conclusion, but when the high-momentum names reverse so quickly, it certainly does suggest we need increased caution. The major indices' rally hid what was going on under the surface. We have seen that quite often in the last few months, and it has been very important to respect those warning signs when they've developed. For example, we have seen quite a big correction already in the stocks that, a few months back, I had referred to as the Four Horsemen: Tesla (TSLA), Facebook (FB), Netflix (NFLX) and LinkedIn (LNKD).

We've seen a rotation into a few new winners in such groups, such as the 3D-printing names, but leadership has been murky for a while. The two leading groups in the market have been solar energy and biotechnology, and both underwent some aggressive selling Monday.

Markets that are making new highs don't just suddenly collapse and go straight down, but that doesn't mean they can't struggle and churn for a while. This quick reversal in the momentum names was a sign of nervousness, and it showed that many of the hard-charging bulls have their fingers on the eject button and will hit that button at the very first sign of problems.

My advice recently has been to stay reactive rather than anticipatory -- and Monday's action deserves a negative reaction. It may just be a minor blip but, when we see reversals like that, it demands increased caution.

Tighten up stops, stay selective with new buying and keep an eye on small-caps and momentum names. There are reasons to be careful after a day like yesterday.



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