Not only did the market ignore Thursday's slight weakness, it moved higher as the week wrapped up. In the old days when the market had some normal human emotions, the bulls would take profits Friday afternoon after a good week. But in this market, the biggest fear is being left behind as it climbs ever higher.
One interesting development today is that the S&P 500 is now up exactly 1000 points from a low of 666 in March of 2009. There were a couple of corrections along the way, but the majority of the time we had a V-shaped move and went straight up. What is most striking is that it occurred despite never having any real economic strength. Nothing has been more true during this run than the old saying, "Don't fight the Fed."
Casual market observers find it difficult to understand why traders may not be excited about a market that acts this way. This action favors buying and holding, not trading. Trading involves taking advantage of market ups and downs, but there are no downs in this market. That is no exaggeration. This market has not closed down more than 1% in more than a month. In addition, there has been almost no intraday volatility. It starts slow and tends to ramp up all day.
I'm bullish and I complain about this market, so I can only imagine how the bears must feel. If there are any bears left, I hope they are sitting on the sidelines and not trying to maintain shorts during this rampage.
Once again, I remind you of what I've said quite a few times lately: Stay with the trend as long as the price action remains positive. It won't stay like this forever, but if you haven't learned that trying to anticipate tops doesn't work, you probably are never going to learn it.
Have a great weekend. I'll see you on Monday.
May 17, 2013 | 8:20 AM EDT
Digging for New Buys
- It isn't easy in this market, but two stocks are on my radar this morning.
One of the easiest mistakes to make in this market is to bet on downside momentum. In normal markets, a pullback might trigger profit-taking, which feeds on itself, especially if the market is technically extended. In this market, a pullback triggers an automatic buy response and that reflex becomes stronger because the dip buyers are consistently rewarded.
Yesterday afternoon's selling has been forgotten and the market is chugging along again as the bulls look for inventory and the bears run scared. Breadth has been weak lately but is much improved today with better than two gainers for each loser. Gold is struggling again but biotechnology, oil and solar energy are leading again.
I've been digging for new buys and it isn't easy. One stock I'm adding to this morning is Revolution Lighting Technologies (RVLT). It made an early move above $4 but is now seeing a little selling pressure. If it can clear the sellers and regain $4, it can run.
Another stock on my radar is Insmed (INSM), which is holding near highs and trying to extend recent strength. Analysts set a very nice target and I believe that will help support it. Santarus (SNTS), Novadaq (NVDQ) and Sarepta (SRPT) are also on my radar.
May 17, 2013 | 8:20 AM EDT
Watch the Dip Buyers
- Are they feeling feisty or cooling off?
The supreme art of war is to subdue the enemy without fighting. --Sun Tzu, The Art of War
It is often said that market tops are a process rather than a single point. Markets that are making new highs don't just suddenly fall apart and go straight down. When stocks have strong momentum, they create very strong underlying support. The higher we go the more people there are that want to buy weakness and pullbacks.
This particular run has created more underlying strength than usual because it has been such an unloved and uncelebrated rally. We have had very little of the euphoria that usually occurs during straight-up runs and there has been a very high level of skepticism. Consequently, we still have plenty of cash sitting on the sidelines looking for entry points.
The way that tops usually play out is that dip-buyers quickly jump in on the first pullbacks. We are seeing it this morning after a weak close yesterday. There is no real fear or worry since we have had so much strength lately and immediately come back when we sell off.
The problems start when there are subsequent dips. The dip buyers lose a little confidence when we start to dip more frequently and don't come back as fast. The dip buyers find themselves trapped when the selling continues and they start to have more doubts about the market. Eventually they are disappointed and instead of jumping in on the next pullback they start selling and try to protect the gains they have left. When bounces start to fail and we make lower lows, the downtrend begins.
We are a long way from that scenario but it is never too early to watch how the dip buyers act. They are feeling feisty this morning and have already recouped much of the late pullbacks, but are they going to be more aggressive at flipping for gains? Is the upside momentum going to cool a bit more like it did yesterday? Is the market strength going to narrow?
Those are all things we need to watch, but what we shouldn't do is be too quick to be negative. The market has still not done anything wrong. We are technical extended and there has been poor economic news, but there are no obvious signs of a breakdown yet. Plenty of folks would love to buy pullbacks and they are going to prevent too much downside from occurring too quickly.
The biggest challenge of this market is sticking with the trend and staying disciplined with new buys, though so many stocks are extended and don't offer good entry points. It isn't easy to chase some of the things after the moves they have had recently, but there is still too much momentum not to be bullish.
When the big picture is this challenging, the best thing to do is take refuge in individual stock-picking. Pick good stocks, manage them closely and don't worry too much about macro matters. When the stock starts to act poorly, dump it and wait for things to improve. You don't have to consider what is going on in the world if you let your individual stocks be your guide.