The bears were downright giddy as they watched the futures on Sunday night but they should have known better than to underestimate the dip-buyers. The bears' dream was that the move to seize funds from bank accounts in Cyprus would trigger bank runs across Europe and scare the market down. Instead, market players immediately bought the gap down open and the market moved back up nicely before late nervousness set in. Despite the late softness, it ended up looking like run of the mill profit-taking on very light volume after a good run, rather than a major economic development.
This Cyprus story isn't over yet but it is going to take more than stupid politicians to put the kiss of death on this market. The moral of the story so far is that when markets go straight up they create a large supply of folks in a hurry to buy a pullback regardless of the news. Market players are far more concerned about their lagging performance this year rather than being caught in a market meltdown. In view of how the central bankers always ride to the rescue, how can we think that it is going to be any different this time? Already we have headlines saying European bankers will give Cyprus more flexibility.
Although the market held up relatively well, there was a little damage done and we'll have to watch a bit more closely to see if the negatives develop further. It is too early to say that a topping process has begun, but they often start with action like this -- which doesn't seem all that worrisome, so far.
I sold down a few things as we bounced back but overall I don't see any reason to be too negative. The bears had a good opportunity to really hit this market and ended up doing little. The only panic today was panic buying as the market bounced back.
Have a good evening. I'll see you tomorrow.
March 18, 2013 | 1:59 PM EDT
The Bulls Have Already Won the Day
- A close with minor losses creates stronger desire for long exposure and stronger underlying support.
As I discussed in my premarket post, I thought it was likely that the dip-buyers would jump in on the Cyprus selloff but I didn't expect them to be as aggressive as they have been. They even managed to bounce the DJIA into the green for a few minutes.
It is a good illustration of how the recent market action has created a large number of market players who want in but don't like to chase a straight-up market. They wait for dips and are ready to move in quickly when we finally have one. It doesn't matter what is causing the weakness. They just know that buying pullbacks has worked extremely well, and if you don't move fast you will be left out.
Two interrelated thoughts to keep in mind are that markets hitting new highs don't suddenly collapse, and market tops are a process that take time to develop. When a market is near its high there are too many people still looking to buy. They haven't been burned by downside action so all they can really think of is what a good idea it is to jump in on weakness. That behavior has been consistently rewarded so it keeps occurring.
At some point, the market will stop making further upside progress and the dip-buyers will grow unhappy with their trades, but it takes a while for that to happen. The dip-buyers need to be burned a number of times before the start to give up on buying weakness. Eventually, the dip-buying will become less buoyant and we'll see a rollover, but the character of the market action doesn't shift that quickly.
We'll see how it finishes, but the bulls have won the day with this quick recovery. A close with minor losses will create an even stronger desire for more long exposure and stronger underlying support.
March 18, 2013 | 10:27 AM EDT
The Market Shrugs
- Cyprus crisis? What Cyprus crisis?
The market has done a very poor job of panicking on the Cyprus news. The DJIA is only down 40 points and all the major indices have bounced straight up from the gap-down open. As I discussed in my opening post, there are too many anxious dip-buyers for the market to fall apart and go straight down.
What we have to watch for are failed bounces. When the dip-buyers are trapped in a bounce that rolls over, the character of the action changes. Dip-buying is almost automatic at this point, but if the bounces stall and retests lows, the mood shifts and the dynamics change.
There's plenty of red on the screens and breadth is better than 2-to-1 negative, but there certainly isn't any obvious panic. Almost everything I'm looking at, like LinkedIn (LNKD), is well off the early lows and even Apple (AAPL) is showing relative strength on talk about increased dividends.
The obvious play on the Cyprus issue is gold and gold miners. If you can't trust banks not to steal your money, why not buy gold and bury it in the backyard? I have my eye on a few gold miners like Timmins Gold (TGD) and Royal Gold (RGLD) but they are fading fast as the market shrugs at this "crisis."
I haven't done any selling into this weakness so far, but I'm going to tighten my stops and unload a few things if they stay red. I'm in no hurry to make any big moves.
March 18, 2013 | 8:32 AM EDT
Girding for a Cyprus Surprise
- The dip-buyers are licking their lips in anticipation.
The very nature of banking has been shaken to its roots. --Dennis Gartman on the seizure of bank deposits in Cyprus
Dennis Gartman, editor of The Gartman Letter, has had a bearish bias recently so he may have a tendency toward hyperbole, but there is little question that the move by Cyprus to seize bank deposits to secure a loan from the European Central Bank is causing great consternation. The obvious issue is if it can happen in Cyprus, why not Greece or Spain or another country that needs a bailout? Even economist Paul Krugman warned that this move is an invitation for a bank run in Europe.
The big question this morning is whether this is going to produce a healthy temporary pullback or be a catalyst for a major market turn. The market has become extended and doesn't have very good support, so some sort of consolidation isn't surprising or unwelcome. We have had a peculiar market lately with a very low volume, straight-up moves that leave both bulls and bears frustrated to some degree. The bulls have not had an easy time putting capital to work and many are going to be relieved to see weakness for a change.
I have often written that markets at their highs don't suddenly fall apart and go straight down. The reason is that psychologically there is always a great inclination to buy the first major dip after a big run. All the folks who were underinvested and missed out want to make sure they don't miss out the next time so they are inclined to jump on the first bout of weakness. The dip-buyers have been consistently rewarded so there isn't too much fear following that course of action.
The danger of major downside really doesn't develop until the dip-buyers start to lose confidence and underlying support erodes. If you look back at all the major downside moves in the market, they all occurred only after the market has been weak for a while. No major crashes have occurred when the market was hitting new highs. The big downside moves are usually in the context of a market that is already downtrending.
When we have surprise news like this we always have to be a little careful to see how it affects the mood, but I already sense that the dip-buyers are licking their lips in anticipation. This market has provided little opportunity for those who prefer to buy pullbacks. As a result, it has created a huge amount of underlying support. Many of these buyers are going to view Cyprus as an irrelevant joke that will be quickly forgotten.
I don't believe Cyprus is going to be the death of this market but it may help to start a topping process. I will continue to give the benefit of the doubt to the bulls and I strongly anticipate that the dip-buyers are going to provide very good underlying support. The bears are going to be excited about this news but there are just too many underinvested bulls to let us go down easily.
I'm not in a huge rush to jump in at the open this morning, but I'll definitely looking for buys as things settle down.