Itching for a Reason

 | Nov 20, 2013 | 4:17 PM EST
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The poor action under the surface of this market that I've been complaining for days proved to be a good warning sign. Even big-cap names like eBay (EBAY) and Lowe's (LOW) joined the momentum selloff.

The headlines are likely to say that the Fed minutes were the catalyst for a downturn in the indices, but my view is that the minutes were just a convenient excuse for a market that was already vulnerable. The irony of the minutes is that just about everyone seems to believe it's old news and not relevant after a number of intervening events. But the word "taper" gives the sellers a reason to do what they are already inclined to do. The technical action told the story; the Fed news was just a convenient justification.

The good news is that we need this sort of action to set up for a good run to end the year. The market is too extended on lighter volume, which has pretty much wiped out attractive setups. There has been very little of interest on my radar screen for about a week, but this dreary action will eventually cure that.

I don't particularly like seeing the bulls so quick to jump on this pullback, but that mentality was worked well. I'm sure we'll see plenty of commentary tomorrow about how the tapering talk in the FOMC minutes no longer applies, but I'm not so sure how aggressive the buyers might be.

I'm a willing buyer, but this market has to convince me that it is done correcting. Nothing that happened today convinces me of that.

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

Nov. 20, 2013 | 1:45 PM EST

Holding Pattern

  • It's quiet ahead of the Fed minutes, but don't expect any surprises.

While breadth and the underlying action are better today, there isn't much zest or vigor. Some bounces can be found in Google (GOOG), Netflix (NFLX) and Vertex (VRTX), but there are few signs of aggressive momentum.

We are in a bit of a holding pattern as we await the Fed minutes at 2 p.m. ET, but surprises are unlikely after Ben Bernanke spoke last night and Janet Yellen set forth her philosophy in her confirmation hearing. We know that the Fed is going to be "accommodative" for some time, but nervousness persists over potential tapering.

While about the action today is particularly negative, I find few setups so I want to see how the close goes. This market needs either a good hard shake or stronger emotions. Right now, it is just drifting with little edge.

Nov. 20, 2013 | 10:34 AM EST

Energy Is Lacking

  • I'm focusing on being opportunistic, rather than bullish or bearish.

A bounce in weak momentum names started the trading day, but energy is lacking and I'm not seeing any inclination to chase them. Breadth is a bit better at around 2,750 gainers to 2,200 decliners, but there haven't been any standout pockets of strength. The problem is a lack of energy. Until that shifts, trading is going to be very challenging.

After two straight weak closes, the bulls need a finish near the day's highs to stabilize the market. The hot money is skittish and standing aside, waiting for sustained buying.

My game plan is to be patient. I suffered damage the last couple of days that forced me to raise quite a bit of cash. Now I have to be selective as I search for ways to redeploy it. While the senior indices look fine, the trading in stocks that I favor has been abysmal at best.

Frankly, we'd be better off with a sharp dip, but anyone who has waited for that this year has been left standing on the sidelines as the market moves higher. I'm going to focus on being opportunistic rather than bullish or bearish.

One stock I did add today is Zhone Technologies (ZHNE), which has a nice base and received a target price of $8 from analysts at Craig-Hallum.

Nov. 20, 2013 | 8:07 AM EST

Stay Cautious

  • Action under the surface continues to deserve our scrutiny.

Underneath this flabby exterior is an enormous lack of character.

--Oscar Levant

Most of the time the major indices do a decent job of informing us about the general health of the stock market. However, there are times when the indices mislead, and when this happens it's often a tip-off that the market is near an important turning point.

During the last two days, the Dow has barely budged, the S&P 500 has been slightly weak and the Nasdaq and small-caps have lagged. If you dig deeper you'll see that the most notable aspect of the market is the major carnage in high-momentum stocks. For example, the IBD 50 seriously underperformed, registering losses of more than 2% for the last couple days. In addition to the weakness in momentum names, we also are seeing quite a few small-caps struggle, and the speculative interest has dried up.

The clearest sign of change in the market is the lack of high-quality leadership. The groups which have been the hottest recently -- which have included 3D printers, solar-energy names and biotechnology -- are all struggling. My list of solar-energy stocks did not show a single gainer for Tuesday.

The hardcore bulls shrug at this poor underlying action and tell us that the market is just undergoing a healthy rotation into new leadership. In particular, they will point at financials as being the new leaders. But it is really the defensive names that have been holding up the indices, and that's not a group that will lead the market higher for very long.

The bulls do have some new ammunition this morning from Federal Reserve head Ben Bernanke. In a speech Tuesday night, he said: "The economy has made significant progress since the depths of the recession. However, we are still far from where we would like to be, and, consequently, it may be some time before monetary policy returns to more normal settings. "

Dr. Bernanke is basically echoing what Fed chief nominee Janet Yellen has recent said in her Senate testimony. But he added some weight to the dovishness of the Fed by saying that, should the unemployment rate drop below 6.5%, that would automatically trigger a cut in the central bank's accommodative policies.

Nothing has been more important to this market than a friendly Fed, so it doesn't hurt to see these comments. However, the market has lately shown a much more sedate response to Fed assurances. The indices seem to have fully priced in a delay in tapering off of bond-buying, and it does seem to matter more now that the Fed is being driven by a persistently weak economic recovery.

Overall, the big picture doesn't look bad, but under-the-surface action deserves our scrutiny. When the best-acting individual stocks start to fall in tandem with one another, it is an indication that the character of the market is shifting. It is possible that the momentum names will quickly find support and turn upward, but the bigger danger is that the cracks will grow and spread to the broader market. Caution is in order until there is greater clarity.

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