One thing many traders have struggled with in recent years is that playing defense at the first sign of trouble so often has been poor strategy. On Friday, we had some of the worst action of the year and many prudent traders had stop losses triggered as they were concerned about downside follow-through.
Instead of selling momentum building, we have central bankers immediately riding to the rescue. We go straight back up as if there isn't a worry in the world and everything that was sold on Friday is now trading higher.
The irony of this sort of action is that it creates an even greater appetite for buying. The folks who were shaken out feel frustrated and are anxious to put money back to work. They would prefer to buy a dip, but when there isn't one, they capitulate and pay up.
The action today was a classic illustration of what happens when central banks catch people by surprise. We gap up and barely downtick the rest of the day. There is no "selling into strength" because the great fear is that the market will embark on another V-shaped move and never provide easy entries.
The bears are still grousing about how this is a highly manipulated and artificial market, as if that is some new insight that is suddenly going to matter. What matters is that people simply aren't going to fight central banks.
Earnings news is hitting, and IBM (IBM) is doing a nice job of exceeding very low expectations. This is the 13th straight quarter that IBM has not had revenue growth, and expectations have been cut by 40% over the past year, but those aren't issues at the moment. It is a beat and that is all that matters right now. IBM has a major weighting in the DJIA, so that bodes well for more upside in that index tomorrow. Lam Research (LRCX) also looks like a good report, and that may help the chip sector.
It is back to business as usual for the bulls. We should all feel foolish about any doubts we may have had on Friday.
Have a good evening. I'll see you tomorrow.
April 20, 2015 | 1:18 PM EDT
Market Action Follows a Pattern
- · Computers are repeating a successful approach.
What is most notable about the action in this market today is how this same pattern is playing out once again. The consistency is amazing but it shouldn't be too surprising when you consider that much of it's computer- driven. Computers are simply reacting to the price action and have found an approach that has worked over and over.
The pattern of the market action is not to sell into the gap up open but to buy any and all pullbacks. There is extremely strong underlying support, but the momentum is limited, which typically produces some very dull and flat intraday action. It is the close of the European markets that seems to produce the sudden slowdown. For the past two hours, the S&P 500 ETF (SPY) has been in a trading range of about 20 cents.
Normally, we will hold steady and then late buyers will emerge as they anticipate upside follow-through tomorrow. We'll see some sort of program action in the last hour, which tends to have a positive bias, but there have been a few late selloffs as well.
The main driving force in this market is fear of being left out. There may not be many people who really think the fundamentals are fantastic and that the market should be much higher, but they have seen how this market refuses to roll over and they don't want to miss out. Market players aren't buying because they think the market is good. They are buying because they feel they have no other choice.
April 20, 2015 | 10:37 AM EDT
Dip Buyers Are Really Aggressive
- ·There are some decent setups developing.
When human beings used to dominate the market action, traders would sell into Monday morning gaps and then look for re-entry at lower prices. In the current market, we just don't see that sort of selling into strength.
There tends to be particularly no early dip at all when we gap up like this. We may have some minor softness for a few minutes, but the buyers are so anxious to add long exposure that we barely take out the opening lows.
Typically, when we start off like this it creates very strong underlying support and we will stay firmly positive the rest of the day. We might not gain much more momentum, but the dip buyers are so aggressive that stocks never have a chance to pull back very much.
Breadth is running very strong, with 4900 gainers to 1300 decliners. There is some slight underperformance in biotechnology, and we have precious metals lagging, but retail, chips and finance are leading the way. The momentum list is solidly green, with most of the key names bouncing back from Friday as if nothing happened. Facebook (FB) for example has almost totally reversed.
I'm looking to add to positions in Twitter (TWTR) and Tower Semiconductor (TSEM) as the day progresses. There are some decent setups developing, but I'm not in a big rush at this point. The leadership should become clearer after the initial euphoria cools down.
April 20, 2015 | 7:55 AM EDT
Watch How Quickly Buyers Step Up
- Markets love it when central banks provide support.
"Rescue someone unwilling to look after himself, and he will cling to you like a dangerous illness."
One of these days, the market will sell off and we won't be rescued by central bank action. Today is not that day.
After some of the worst action of the year on Friday, the People's Bank of China lowered the reserve requirement for all banks and pumped the equivalent of about $200 billion into the Chinese economy. Chinese planners had set the stage for this by attempting to reign in some of the wild speculative interest in the China stock market, but that cheap cash still has a way of driving of equities.
This move by the PBOC isn't a big surprise. There have been great concerns about the extent of the slowdown in China, but the size of this cut was greater than expected. Some market players might think that it's a negative that the economy is in such poor shape that it needs so much help, but that simply isn't the thinking that has tended to take place in this market. When central bankers provide liquidity, the markets celebrate. That is all you really need to know.
So the big question now is whether this move will offset the ugly breakdown that occurred on Friday. Early indications are for a bounce, but not enough to recoup all the losses that occurred last week. Quite often, we see trend days develop after a positive Monday morning.
The buyers just keep on coming and we rally for most of the day. It is fairly rare for an opening strength to be sold, although you might think it is logical for trapped bulls and aggressive bears to sell into a good open.
Keep in mind that we also have a large number of earnings reports this week, as well as the ongoing drama in Greece. Greek bonds continue to sell off, but this market has consistently found reasons to be optimistic that the crisis would be averted, and it won't be a big surprise if it does again.
There isn't any major economic news on the agenda, but the endless chatter by Fed members about the timing of rate hikes is likely to continue. The market has been uncertain how to react to the Fed lately, as we have had so little economic news that has exceeded expectations, but there is talk that things are still moving in a positive direction.
While there is plenty of news flow to move things around, the most important thing of all is the price action, and that is quite mixed. We had been walking up on very slow and dull action, until we were clobbered on Friday.
We are rebounding very strongly this morning and the pattern generally has been a pretty quick recovery when these conditions exist.
Betting on another rollover is tough, but we have quite a bit of distribution lately, and tepid leadership. The momentum has been very spotty, but the fear of being left behind seems to save us quite often.
At this juncture I will not be looking for this bounce to fail that quickly. It simply has not paid to underestimate the power of central banks to put the market in an upward trajectory and keep it that way. I'm not going to be aggressively chasing the open, but I do have my eyes open for some new buys.
Watch to see how quickly the buyers step up on the first dip after the gap up open. Typically, they provide good support very quickly. If that shifts, then things may be different this time, but I suspect that we will see very strong underlying support and that the dip buyers will be aggressive.