Proceed With Caution

 | Dec 02, 2013 | 4:24 PM EST
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One of the best tests of the overall character of the market is how it closes. Good markets close strong, poor markets close weak. While that may be a simplistic generalization, increased caution after a couple of weak closes isn't a bad idea, especially when there is notable weakness in small-caps.

Today was one of those days where it was easy to get nicked up if you had small-cap positions. The iShares Russell 2000 (IWM) gave back three days of gains and many individual small-caps did even worse. There wasn't much support and dip-buyers sat on their hands.

One of the more troubling things about this market is the extremely high level of confidence for a strong finish to the end of the year. Talk of a "Santa rally" has already started, which technically is supposed to occur in the week between Christmas and New Year's Day. That sort of complacency should make the bulls cringe.

I can't say I'm disappointed to see deeper corrections. It has been a major struggle to put capital to work as we have rallied with so little energy. Hopefully, we'll see resets and that will set us up for a good close to the year. The best thing that could happen is for the bulls to develop a little caution. Too many folks take for granted that the market will rally for another month.

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

Dec. 02, 2013 | 1:48 PM EST

No Rush to the Exit

  • The lack of energy isn't scaring anyone away yet.

The indices barely have a pulse and breadth is poor, but there doesn't seem to be any big hurry to exit positions. One of the toughest things for the bears lately is that even when buying pressure dries up, as it has today, there isn't any rush to sell. When stocks are stalling, that often pushes some to lock in gains, but we aren't seeing much of that so far. In fact, it looks like the bulls are hoping for better pullbacks so they can buy the dips. The lack of energy isn't scaring anyone away so far.

I've often noted that a market top is a process that takes time to develop. Things don't suddenly fall apart after new highs. Too many people want to join the party and they are strongly inclined to buy initial pullbacks from highs. They only become discouraged after being caught in failed bounces several times, and this market has barely had any failed bounces in quite a while.

If you do have a bearish bias, you will have to stay patient. Just because the action is slow doesn't mean that the end of the rally is near. The bulls have to be discouraged, and this market isn't doing a very good job of scaring away buyers.

Although the action isn't that bad, I'm definitely bored and not finding much to do. Some of my small-caps aren't acting particularly well, but it is just too thin and slow to rush for the exits unless you have too much size.

One thing to watch for is a weak close. After Friday's poor close, another today would be discouraging and may affect sentiment.

Dec. 02, 2013 | 10:28 AM EST

The Market Looks Tired

  • It needs a good washout to shake things up.

The Monday following Thanksgiving week has typically been a poor trading day and, so far, the statistics are working in favor of the bears. Breadth is running about 2-to-1 negative and, after a good start, Apple (AAPL) has reversed into the red. We are seeing a little life in financials, but biotechnology, energy and precious metals are struggling. Small-caps are also seeing bids disappear.

The market looks tired and market players are showing little inclination to chase -- especially given the recent lack of energy in the market. The action was good last week but we never had any of the euphoric action that so many in the media keep talking about.

I have little going on as there simply aren't many setups. What we really need is a good washout to shake things up, but counting on that has not been a good strategy this year. On my screens right now, I am interested in Zhone Technologies (ZHNE) and SunEdison (SUNE). But the action is very mixed and uncertain and I'm not going do anything sizable at the moment.


Dec. 2, 2013 | 07:35 AM EST

Stick With the Market as Long as You Can

  • Only turn bearish when the price action shifts.

"Common sense is the most widely shared commodity in the world, for every man is convinced that he is well supplied with it." -- René Descartes

After a generally positive Thanksgiving week for stocks the big question as we kick off December is whether we are finally ready to correct a bit?

It seems like common sense that we might at least rest a little after the run we've enjoyed all year, but probably the biggest mistake you can make is to think that the market acts in a manner that seems reasonable. Most people believe that they possess common sense and they don't feel it is unreasonable to think that the market has run a bit too much and is ready to rest. There is nothing illogical or irrational about that, but the market simply doesn't function using the same sort of rationale as we poor humans do.

What is often ironic about the market is that the longer it trends upward and the higher it goes, the greater the pressure there is for it to continue. This year in particular, the relentless rise of the indices has left behind many fund managers who are desperate to catch up. The way that fund managers try mostly to catch up is by putting money in high beta, big-caps and hope that they outperform the indices. That has been part of the reason we've seen strength in Apple (AAPL) recently.

My feeling about the market is probably shared by many other money managers. I'd like to see a correction because there are few good setups and volatility tends to produce better trading opportunities. One-way markets, especially when they are slow like this one, do not give aggressive traders much of an edge. The best trading markets are typically those where emotions are strong and we have a lot of movement intraday. Recently we have had just the opposite of this with positive but not euphoric sentiment and plenty of flat action intraday.

As I've commented many times this year, the worst thing you can do is to keep trying to find reasons to call a market top. There is nothing easier than finding justification for a bearish viewpoint. At this juncture, the bears are taking a contrarian approach and arguing that everyone is already bullish, therefor there is limited buying power and the likelihood of a rollover.

Maybe they will finally get it right this time, but none of those timing arguments has worked this year. The best approach has been to stick with the market as long as you can and only turn bearish when the price action shifts. The problem with that is that we bounce back so fast after a dip that you can feel a bit foolish for taking some defensive steps. The important thing is to not play the top-calling game. It is a losing strategy and has been particularly painful this year.

We closed weak on Friday and we are looking at a quiet start his morning. Twitter (TWTR) has initial coverage, retail sales were down slightly year-over-year and overseas markets are mixed. It looks like it is going to be slow going.

At then time of publication "Rev Shark" had no positions in stocks mentioned.

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