Not only was the action today a textbook version of a V-shaped bounce, but we had the classic catalyst of a Fed member saying that it would be crazy to raise interest rates any time soon. In addition, Greece was saved again, which is always a favorite theme. The market has feasted on this sort of news and reaction for years and so far it looks like 2015 will be no different.
The great irony of this action is that it was greeted with so little enthusiasm. The television pundits celebrate because they really are clueless about trading, and the indexers and buy-and-holders love it because up is good no matter what. The folks that struggle the most with it are the traders who never seem to be in position for the sudden gap up open.
Even more ironic is that this sort of action helps to create the conditions for it to continue. There is now a large crowd of underinvested bulls who are desperate to add market exposure on any pullback. They are so anxious that they provide tremendous underlying support and prevent any backing and filling.
Everyone knows that this is likely to end badly, but worrying about that right now is a sure way to underperform.
Tomorrow morning we have the December jobs report. With interest rates already so low a poor report is not likely to be a positive. Good news will likely be good news, but there are other things driving the Fed right now such as oil, Europe and Asia, and I don't expect a major reaction to the report.
The bulls are working hard on this V move and it hasn't paid to fight them. Maybe it will be different this time but that is a very risky bet.
Have a good evening. I'll see you tomorrow.
Jan. 08, 2015 | 1:39 PM EST
Keep Hunting for Entries
- There simply is no easy way to deploy capital.
One thing I miss about the old days is that we used to celebrate big rallies like we are seeing today. The response now is that it is just more artificial action and manipulation that is sure to cause a disaster down the road.
While traders are happy about making money, they are grumbling about being underinvested and not having any opportunity to really build positions. In other words, its classic V-shaped action once again.
This sort of action is the reason that so many money managers are lagging the market. The only way to keep pace is to buy and hold index ETFs. Ironically, that happens to be the strategy of most of the outperforming, active money managers.
I hear from a tremendous number of traders that are disgusted with this sort of market action that forces them to constantly chase. Stock picking has become inconsequential to a great degree because the movement in the indices renders it meaningless.
I'm in the same boat with the vast majority of traders who are making money, but woefully underinvested. There simply is no easy way to deploy capital when you are down 3% in two days and immediately gain it all back. Action like that favors simply sitting and doing nothing.
The way this market is acting right now, there is tremendous underlying buying support from underinvested bulls. We are likely to see a solid finish. If you have idle cash just keep on hunting for entries.
January 8, 2014 | 10:48 AM ET
Like Jumping on a Moving Train
- The chasers aren't the dumb money any more.
The power of central bankers is on display this morning. The market already has an inclination toward V-shaped bounces and when a Fed member comments that raising interest rates would be a disaster, there isn't much choice but to rush to put cash to work. Unless you have been in a coma for the last year or so, you should know that this is classic V-shaped action that won't end quickly or easily.
Breadth is extremely strong again at better than 4 to 1 positive, but biotechnology isn't leading for a change. The group is still up but chips, retail and homebuilders are running. Wal-Mart (WMT) is one of the major leaders, which doesn't happen often, but it seems to be a "go to" play on lower oil prices.
Momentum names are outpacing the indices again, with Chipotle (CMG) and Baidu (BIDU) leading the charge. Even laggard Alibaba (BABA) is attracting money.
The big challenge is jumping on a moving train. Some traders have no problem buying stocks that have already jumped significantly, but that is what has worked so that is what they do. If you spend too much time looking for consolidation, bases and technical follow-through, you never have a chance to put much money to work.
The irony is that chasers used to be deemed the dumb retail money that was acting emotionally. Now the big money players waiting for entry points are the dumb money.
Like many, I'm trying to put more cash to work. Trades in TG Therapeutics (TGTX), Advaxis (ADXS) and Tower Semiconductor (TSEM) are working, but I still have too much idle cash.
Jan. 08, 2015 | 7:00 AM EST
The Fed Does It Again
- Up we go, and when it stops nobody knows.
"I think that a logical policy response at this juncture may be to delay the end of the QE."
--James Bullard, President of the Federal Reserve Bank of St. Louis
Back on Oct. 16, 2014 James Bullard triggered a massive V-shaped move in the market with the above comment. His primary reasoning was that inflation expectations were very low, but the cynics pointed out that these comments came as the market was undergoing its worst correction in several years.
This morning it is being reported that Charles Evans, President of the Federal Reserve Bank of Chicago, said that the United States may not hit the Fed's inflation target until 2018 and therefore "we should be in no hurry to raise interest rates". He made his point even more emphatically by saying that it "raising rates would be a catastrophe".
Charles Evans is well known for his dovishness and his comments aren't that surprising, but this is a market that for years has lived off cheap money from central bankers and V-shaped moves. That is the mix we have this morning, which is causing a sharp move up in the early going.
For attention-seeking market pundits, the easy thing to do is to keep predicting that this pattern will come to abrupt and painful end. It actually offends many market commentators who are convinced that they are smarter than the market. The response is reflexive and unthinking, and the crowd that acts this way should be punished for their stupid behavior. Disaster is inevitable and this market is ignoring it, so say the pundits.
I don't know how this will eventually end, but I do know that trying to fight this sort of action is just plain dumb. We have a very strong history of V-shaped moves and that makes them more likely than not. Market players love patterns and they will keep on embracing them when the conditions are right. With the comments from Dr. Evans this morning, the conditions are right.
The excitement this morning comes on top of an interesting day when some of the momentum stocks looked downright frothy. The overall market had a solid oversold bounce but what was most notable was how strong momentum names, particular biotechnology, were. Stocks in the IBD 50 with a gain of 2.7% easily beat the S&P500, which was up 1.2%.
While the action seemed a bit overheated, it was understandable, as market players were simply in a rush to position for the anticipated V-shaped bounce. Their instincts were quite good, as that is what the Fed heads are delivering for us today.
So what do we do at this point? We look for buys and you ignore the bears who will tell us once again why this action is wrong and sure to end badly. What we know is that you have to stick with the price action, even if there are fundamental and technical arguments that make the bulls look like fools.
Market players love patterns. At some point they become too obvious and too anticipated and eventually fall apart, but the power of dovish central bankers and V-shaped moves are just too compelling right now. Up we go, and when it stops nobody knows.