A Very Shallow Pullback

 | Dec 19, 2013 | 4:20 PM EST
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After a day like Wednesday, the best thing the market could do today was digest and consolidate gains. If it goes up too far too fast, there's risk of a quick reversal. But if it churns a bit, that gives a better foundation for sustained strength.

The pullback today was extremely shallow, but that has been the nature of the action this year after a breakout move, as I discussed in an earlier post. It tends to keep running with little opportunity for dip-buyers to jump in on weakness.

The current breakout has added attraction as it occurs with just seven trading days left in the year and at the height of positive seasonality. While market players didn't chase a lot today, they seemed confident this move isn't over yet. And while contrarians don't like self-fulfilling prophecies, they often work very well.

I see no reason to fight the trend. Conditions favor the bulls, and I've been adding long exposure. I will keep pushing to the upside for as long as I can. It looks to me as if traders are ready for some holiday trading. We just have to keep looking for the stocks that they will favor.

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

Dec. 19, 2013 | 1:15 PM EST

High Anxiety

  • More fear being left behind than being caught in a reversal.

One tendency of the market in 2013 is not to pull back much after a big move. This frustrates bears who never get a chance for a quick short and bulls who don't get to buy pullbacks and dips. The action creates big underlying support because the further it runs up, the greater the anxiety of being left out is.

A good example of that phenomenon is happening again today. After a pause this morning, the market is back around even and there seem to be plenty of traders willing to buy on a pullback of a few pennies. There's little upside momentum and breadth is solidly negative, but there appears to be more fear of being left behind than fear of being caught in a reversal.

I continue to find it challenging, but I'm putting cash to work in names like SolarCity (SCTY), AcelRx Pharmaceuticals (ACRX), Horizon Pharma (HZNP), Plug Power (PLUG), Baltic Trading (BALT) and my stock of the week, 3D Systems (DDD), which finally woke up after an estimate cut this morning.

I suspect the anticipatory bears are going to experience the same thing they have experienced numerous times this year and find out that overbought and extended markets can keep running without much of a pullback or correction.

Dec. 19, 2013 | 10:35 AM EST

The Action Fades

  • That's keeping the hot money on the sidelines.

The market needed to consolidate gains after Wednesday's big move, and that's happening this morning. We have seen mild pullbacks with breadth running about 1,700 gainers to 2,800 decliners, but this is healthy after a rally like the one we saw yesterday.

The key is continued underlying support and dip-buying interest. We want to see the underinvested bulls that missed out yesterday snap up stocks on slight weakness. That is happening, and you can bet that if yesterday's highs are taken out, buy stops will be triggered as bulls chase and bears cover.

Despite the generally good action, it still isn't easy to put cash to work. I added SolarCity (SCTY), which is trying to reverse a recent downtrend. I'm also interested in InterCloud Systems (ICLD), which had a recommendation yesterday and is finding support around $10.

I'm still hoping better holiday trading develops as the year winds down. So far, the sort of speculative energy that makes things interesting has been missing, but there's still time. The action is slowly fading now, and that is keeping the hot money on the sidelines.

Dec. 19, 2013 | 7:28 AM EST

Reading the New Fed Road Map

  • Stick with the trends and try not to anticipate a market turn.

Expect nothing. Live frugally on surprise. --Alice Walker

The Fed surprised the pundits on Wednesday by announcing its long anticipated 'tapering' program but the bigger surprise was that market players celebrated the news. Many market commentators were convinced that tapering would spook the market and produce a major selloff. Instead, the news was celebrated as it put an end to the uncertainty of when the tapering would finally start. As we all know, the market hates uncertainty.

So is it clear sailing from here or was this just an emotional reaction to surprise news that will quickly fade?

The bears are convinced that higher interest rates will ultimately doom the market. Now that the Fed is cutting its bond buying the bulls no longer have "don't fight the Fed" working for them to the same extent it has the past few years. But that doesn't mean that the Fed still isn't accommodative. The cuts taking place are minimal, but the bears' argument is that it is the direction in which the Fed is moving rather than the magnitude of the movement that is important. Without the additional billions provided by quantitative easing, can we really expect the market to keep on running?

The bulls' response is that tapering is not a major negative. They say it is positive that the Fed is finally starting to slow the growth of their balance sheet and to make moves to prevent inflation from becoming a problem. We have enough economic strength to justify it, and the Fed can always reverse itself if it becomes necessary.

I'll let the economists argue over this and focus instead on the price action. Obviously, the message Wednesday was that the market isn't worried at all about tapering and market players are ready to wrap up a good year with a little positive seasonality.

Some pundits will claim that the market action is irrational and will try to fight it. They have been doing that all year and have paid a high price for their obstinacy. The best approach to this market has been to stick with the trends as long as possible and to not try to anticipate a market turn.

We are at a particularly interesting juncture right now as the end of the year tends to produce positive action and we just had a breakout move in the indices Wednesday.  Investor's Business Daily moves its market rating from "uptrend under pressure" to "confirmed uptrend" and momentum traders are eager to put money to work and ride some follow through.

I've seen a number of comments about how the statistics don't favor more upside after a big move on Fed day, but at this point it is the bulls' game to lose.  There is a lot of bullishness out there which makes the contrarians even more negative. But many bulls have been struggling to put cash to work and don't appear to be overly excited about the market.

The biggest negative I see right now is that leadership is quite muddled. We had Twitter (TWTR) and Facebook (FB) leading for a while but there aren't the hot pockets of action you'd expect to see in a market making new highs. Small-caps have been particularly tricky lately as it is a mixed bag as to what will work.

A little pullback at this point would be a good way to digest the move, but then the key will be the aggressiveness of the dip buyers. I'm ready to put some money to work but I don't expect it to be all that easy to do so.

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