After a huge move on Tuesday we underwent some routine consolidation today. It is exactly what you want to see after some frenzied buying.
Action like today allows profit takers and flippers to exit and some new money to flow in and provide support.
Given the size of the move on Tuesday the selling today was extremely mild, which just confirms what I've been writing lately about how many market players are desperate to put cash to work. They aren't seeing easy entries, which is what keeps the pullbacks so shallow.
I suspect that the bears will be yammering about the high level of positive sentiment and how there isn't any real worry out there, despite the poor economic news we have been seeing. But what they are overlooking is that the bulls still have cash to keep the market running. Until the nature of the action shifts, there just isn't any reason to dwell on the possibility of a top.
At this point there is little to do but to keep on looking for new buys. Protect your gains and take some partial profits if the charts are too frothy, but stick with the longs until there is a change in the character of the market. As we have seen many times in the last few years, these rallies can last much longer than we may think is reasonable.
Have a good evening. I'll see you tomorrow.
March 5, 2014 | 2:11 PM EST
- We need consolidation and this is a good way to get it.
The market is churning with a slightly negative bias but that is a good thing after the buying frenzy yesterday. We need consolidation and this is a good way to get it. There are still good pockets of momentum and no rush for the exits. It is just healthy profit-taking in places, with traders being a bit more selective about buys.
It will be particularly interesting to see today's close. I suspect that there is still a great need to put cash to work, and buyers will grow impatient if the market doesn't sell off harder as the day winds down.
If you are locking in gains today, it is a good idea to contemplate how you feel about adding back a stock that you sold at a lower price. Many market players have a hard time doing that but it can be quite helpful to cultivate the mindset that a new buy of a closed position is a totally independent transaction. It is easy to dwell on the fact that maybe your earlier sale was optimal, but that should be irrelevant when you consider whether it may be a good time to buy the same stock again.
Some of my best trades are stocks that I had sold and then rebought when they acted better. In a market like this, it can be a good form of insurance. Too often, we limit our choices because we don't want to trade a stock that we have already traded. We need to keep looking at stocks with fresh eyes and not be blind to the opportunities they may still hold simply because we have emotional baggage.
March 05, 2014 | 10:59 AM EST
Tuning Out the Big Picture
- All that matters to this market is putting idle cash to work.
After yesterday's rampage, the market action is a little sloppy this morning but still with plenty of momentum. Breadth is running slightly negative and there's a pullback in biotechnology and solar energy, but market players continue to beat the bushes looking for places to put money to work.
Most notable is the weak ADP jobs number and the poor ISM services report having no impact on this market. As I've been discussing lately, the market simply doesn't worry about big-picture fundamentals right now. The only thing that matters is putting idle cash to work and not finding easy entries.
I've been a net seller this morning as I lock in recent gains, but E-Commerce China Dangdang (DANG), Phoenix New Media (FENG), Relypsa (RLYP), SunPower (SPWR), Dehaier Medical Systems (DHRM), Real Goods Solar (RGSE), BioTelemetry (BEAT), Kandi Technologies (KNDI), Trina Solar (TSL) and Renren (RENN) are on my radar for possible additions or remounts as they develop. One new buy this morning is Youku (YOKU), which has a nice cup-and-handle pattern over the past month with good volume.
If the market can hold steady and consolidate, it will give us more charts to work with. But I'm inclined to err on the side of selling to protect profits from a good run.
March 05, 2014 | 7:59 AM EST
This Is Simple Supply and Demand
- That's what is driving this market. It's not about fundamentals.
"'Go back?' he thought. 'No good at all! Go sideways? Impossible! Go forward? Only thing to do! On we go!' So up he got, and trotted along with his little sword held in front of him and one hand feeling the wall, and his heart all of a patter and a pitter." -- J.R.R. Tolkien, The Hobbit
The indices had one of their best days of the year on Tuesday, and the big question now is: How much longer can the market continue to run?
The move on Tuesday was a classic breakout on high volume and strong breadth. Markets that move like that don't just suddenly fall apart and go straight down. Many hopeful bears like to predict that sort of turn, but it doesn't happen that way because strength of that magnitude creates a great appetite for stocks.
Quite often the bears who are battling a move like this aren't really that negative. They are just frustrated because they want to put money to work and don't want to chase a market making new highs. They let their hopes and wishes color their objectivity.
It is very easy to overthink market action like this, as market players are always striving to stay one step ahead of each other. Rather than just embrace the trend and stick with it, they constantly look for reasons to explain why it won't last, and as a result they miss out on gains.
It should be quite clear that this market has had a tendency toward very strong uptrending action. We saw it throughout 2013, and we have seen it again following the early-February low. Many market players, including me, were surprised by how powerful the V-shaped bounce has been over the last month, but it is a clear reflection that there is just too much cash out there chasing too few stocks.
In other words, what's underpinning this market is simply supply and demand -- and one of the big mistakes that the bears continue to make is in thinking that fundamentals should be driving the indices.
The action on Monday was a good illustration of how market players are focused on buying rather than selling. We never saw any real selling pressure on the Russian-Ukraine news because market players were so focused on finding entry points.
This lack of fear is one of the things to which the bears point as an indication that the market is ready to top out. But their mistake is to ignore the price action -- which clearly says that, while there is a lot of bullishness, there is also great frustration caused by the inability to find entry points. Excessive bullishness is only a negative when it has been acted on. This market has not allowed the bulls to fully deploy their capital, and that is why stocks keep on running.
At this point the best thing the market can do is consolidate and digest recent gains. Just keep an eye on the support provided by the dip buyers, who are the heart and soul of this market. As long as they stay hungry, it will be futile to even talk about a market top.
We have some economic news coming up, and that may cause a few jiggles, but overall the focus remains on finding entry points and putting idle cash to work.