The Rally Has Probably Run Its Course

 | Dec 27, 2013 | 3:53 PM EST
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Stocks finally cooled off today, and traders are now wondering if that marks the end of a very well-anticipated Santa rally. We have two more full days of trading in 2013 next week, but those days are often marked by strategic concerns such as window-dressing, tax issues and cash levels. We'll likely see some pockets of action as traders try to rack up some last-minute relative performance, but it is likely that the bulk of the end-of-year rally is behind us. Attention should turn to the question of what 2014 will hold.

The most notable action today was the big reversal in Twitter (TWTR), which has been the leading stock during the Santa rally. Breadth was only slightly negative, and the indices were down just slightly, but there was plenty of profit-taking in some of the stocks that have performed the best recently. I heard a number of comments from traders today that they have had a good run and they will lock in gains to assure they end the year with accounts at their highs.

Unfortunately, the Grinches who run the NYSE have us closed only on New Year's Day next week, and that means we have a couple of long days of slow trading to close the year. Of course, the media will fill up the time with experts who will give us useless and incorrect predictions about the market, just like they did a year ago. When there is no news to report, there is little choice but to ask people to simple make random guesses about the future.

I'll probably flip to ESPN and will be looking for some quick trades between sporting events to conclude the year. However, at this point, I'm leaning more toward defense than offense.

This weekend is a good time to start thinking about how we can do even better in the year ahead. Have a great weekend. I'll see you on Monday.

Dec. 27, 2013 | 1:53 PM EST

Profit-Taking Pressure Appears

  • The indices are holding up, but some individual stocks are getting hit.

The indices are still holding up extremely well, but there is plenty of profit-taking hitting in individual stocks. Twitter (TWTR), which has been the poster boy for the market action lately, is probably the best example of the pressure that is hitting.

It is not at all unusual to lock in gains before the end of the year, despite the conventional wisdom that people will delay tax consequences until the new year. I recall very sharp selloffs in the last few days of the year that have surprised folks who thought that window-dressing and tax planning would prevent any sort of pullbacks.

I don't like to carry a lot of inventory into the new year, so I'm clearing out some of the small positions I've accumulated recently. I'll maintain some concentrated positions in long-term plays, but my inclination is to kick off 2014 with plenty of cash and my accounts at highs.

We've had a great run, and it is very easy to give back some sizable gains quickly if you don't manage positions closely. There is still some good action out there, but more land mines as well.

Dec. 27, 2013 | 10:39 AM EST

Big-Caps Showing Some Red

  • At year-end, traders have more of an inclination to sell into strength.

It is a little choppier out there this morning, with small-caps lagging for the second day and some profit-taking hitting big-cap favorites. There isn't any rush for the exits, but there is a fair amount of red on my big-cap screens.

The psychology of many traders at this point is to keep portfolios as close to highs as possible. The goal is to finish the year at the high point, so there are probably some very tight stops and a greater inclination than normal to sell into strength.

Twitter (TWTR) is a great example of how momentum stocks develop. Now that the straight-up move has ended, we have an interesting battle between shorts who are convinced that valuation concerns will eventually kill it and bulls who respect the power of momentum and short squeezes. There are more likely to be flippers playing it now, and that will make for some good intraday volatility. The daytraders are going to keep volume and volatility elevated, and there is going to be formidable support from lots of traders who will be looking for another big run. I'm all out of Twitter now, but I will be looking for setups to play.

InterCloud Systems (ICLD) and Bitauto Holdings (BITA), which I mentioned yesterday, are performing well, and I added some Zhone Technologies (ZHNE), which has been on my radar for a while is improving nicely. I added to a position in China play ChinaCache International Holdings (CCIH). I'm not seeing many small-caps with sustained momentum this morning, so I've not done too much new.

The market looks like it may have a profit-taking bias today, so be careful out there, especially later in the day if we are testing the intraday lows.

Dec. 27, 2013 | 7:41 AM EST

Classic Seasonality Continues

  • Traders aren't at all worried about being caught in a quick reversal.

"Logic is the beginning of wisdom, not the end." -- Spock

With the market making a furious run to new highs and just three trading days left in 2013, the big question is whether we are set up for a bout of profit taking. That would seem logical, but using logic to time the market is not only tricky, but downright misleading at times. 

At the moment market players are enjoying classic positive seasonality and aren't at all worried about being caught in a quick reversal. That seems like the smart move since markets at their highs, especially near the end of the year, don't just suddenly fall apart. All year long, the bears who have been trying to call a top in this market have been wrong as extended conditions only become more extended.

But the tricky thing is that there is likely to be some profit taking pressure by those who are making strategic moves to prepare for the New Year. There will be higher tax rates in 2014 and not everyone is betting that we will go straight up from the first day of the year like we have the last two years.

There are also fund managers who prefer to book gains rather than carry unrealized profits into the New Year.  If you are managing tax-free funds, it may even be preferable to take gains in front of tax-paying investors who might choose to wait.

One sign that there may be some inclination toward locking in gains was the relative weakness in small-caps yesterday. These stocks are thinner and there is likely to be more concern that profit could slip away if they aren't locked in at the right time.

The hot money has been flowing into high-beta big-caps like Twitter (TWTR) and (AMZN). That has been the go-to play and traders will continue to push that as long as they can. What we have to watch for is greater profit taking pressures in other areas of the market as it will start to spread quickly once the momentum slows.

This is a very tricky time of the year, as volume slows and market players make moves for individual reasons. Fundamentals remain irrelevant while positioning last-minute performance and strategic considerations drive the action.

The biggest danger is to think just because the market has made a big run that it is suddenly going to reverse very quickly. During 2013 we have learned that is seldom the way things play out. Individuals have an inclination that their view of what is reasonable can be used as logic to time the market. The market simply doesn't think like an individual, so trying to apply the logical reasoning of an individual investors doesn't work very well.

We have a mixed start and little news. We'll see how things develop.

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