It's a slow motion, low energy breakout in the indices but that doesn't mean the gains aren't real. While the complaints about the weak technical foundation for this move are loud the smart traders have learned to ignore those issues. Weak technical patterns simply aren't predictive, especially when it comes to further upside.
If you want to find flaws with this market it is not difficult. Breadth isn't so hot, although the momentum names are doing much better today. The IWM had been lagging but came to life today and outperformed. Volume is pitiful but the level of new highs is slightly better as it exceeds the 250 level.
For many market players the big challenge is establishing sufficient trust so that deploying capital doesn't feel like it is forced. Some traders are perfectly happy buying new highs in select names. They ignore the complaints about the big picture and simply stick with the momentum that they find. They are staying reactive and don't anticipate at all. However, that can be hard for other traders who use a different approach.
I try to stress how important it is to stay with the trend even when you have doubts about it. This action is a classic example of how it can be quite easy to be too cautious if you focus on secondary measures to price. If you are having a hard time liking this market, it is important to consider your mindset.
Keep in mind that markets that are making new all-time highs don't just suddenly collapse. Even if you have doubts about whether the uptrend will be sustained that doesn't justify a bearish posture.
Have a good evening. I'll see you tomorrow.
MAY 18, 2015 | 1:51 PM EDT
Positive, but Dull, Trading Action
- If you're looking for good setups, better have low standards.
The market is in positive territory but doing nothing to make itself more likable to market players. Breadth is solidly positive but the action levitating on air. Volume is pitiful and if you are looking for good setups, you had better have low standards.
While many stocks are seeing slight elevation as the market grinds higher, there is also a small group becoming wildly extended but still being chased. Ebix (EBIX), Chanticleer Holdings (HOTR) and Cal-Maine Foods (CALM), for example, don't offer any logical entry but momentum players are still happy to buy stocks that go straight up.
There is no easy way to deal with dull, low-volume breakouts other than to accept them and not fight the action. They can cause great frustration because there isn't any obvious way to put capital to work. This action creates a "wall of worry" mentality, with the worry being fear of not having enough exposure. There is no real fear of losing money. The big fear is not making enough money, or underperforming as the indices hit new highs.
Much of how you perceive this market depends on your style. The buy-and-holders or folks who are allocating to indices or retirement funds see absolutely nothing wrong with a market that is running up in this way. Many traders, on the other hand, find the rally unhealthy, but they are constantly wrong about whether it can be sustained.
The market is on track to keep plugging along, and the fact that so many people are frustrated with it only makes it more likely.
May 18, 2015 | 10:46 AM EDT
Buy Programs Help Stocks, But Not Much
- Bulls aren't showing enough conviction to move things higher.
For the past few years, gap-down openings on Mondays have automatically triggered computer programs that buy on dips. That's been amazingly consistent for a very long time, and I can't recall the last time that we had a trend-down day following a poor Monday opening. The dip-buying programs also do a nice job of providing support once they're activated, so we don't typically see an intraday reversal.
While the indices are off of their early lows, they aren't running away to the upside. Breadth is slightly negative overall, but the momentum screens are showing some relative outperformance. We have biotechnology and chips leading, while energy and bonds are the laggards.
I'm looking to put more cash to work, but it's tough to do anything sizable.
May 18, 2015 | 7:18 AM EDT
The Bulls Still Have the Edge, but It's a Narrow One
- This market has had an issue with follow-through lately.
"Don't wait for extraordinary opportunities. Seize common occasions and make them great. Weak men wait for opportunities; strong men make them."
--Orison Swett Marden
Over the past few weeks the market has been struggling with a number of issues. Interest rates have been rising, economic news has been generally weak and earnings season contained quite a few disappointments. Many market players were starting to feel that a severe correction, which has been long awaited, was starting to develop.
Of course, this was the signal for the market to produce a rally without any clear catalyst. On Thursday we moved sharply higher on increased volume and closed near all-time highs. It may have been a bit of surprise, but it was not uncommon for this market that moves in such strange ways on the never-ending support of central bankers and computer programs.
On Friday, the indices held on to most of their gains on lower volume, despite option expiry. It was the sort of action that comforts bulls who like to see some consolidation after a good move. However, this market has had an issue with follow-through lately, and the bears are already making noise about another failed breakout. We have been in a trading range since February and despite a dozen tries, have not been able to put together a breakout move.
Another issue that the bears are focusing on is the underperformance of small caps and the Nasdaq. The iShares Russell 2000 (IWM) has not been able to even regain its 50-day simple moving average and the Nasdaq is lagging both the S&P500 and DJIA. Typically, it indicates a healthier market when the more speculative stocks in the Nasdaq and small-cap indices are leading.
This narrower market is further confirmed by the relative low number of stocks hitting new 12-month highs during the course of the day. On Friday it picked up a bit, but is still around 200 stocks, which is quite limited for a market that is making new all-time highs.
While the price action does have some flaws, it is tough to argue with it; but what is a bigger problem is the lackluster sentiment. Joyless rallies have been common place for a while but the lack of excitement out there is reaching new depths as the summer seasonality slowdown starts to kick in and market players refuse to embrace the wonderfulness of this uptrend. There are plenty of perma-bulls, but the attitude often is that we are forced to buy this market even though it would be better if we had a correction.
The big issue this week is whether the move last Thursday is going to finally push us out of the sloppy and choppy trading range and help a new uptrend to develop. We have not seen many signs of our old pal, the V-shaped move, recently as progress has come in fits and starts. The one-way action created by V-shaped moves feeds on itself, as market players climb the wall of worry that they will be left behind.
If the bulls are not able to generate some better momentum, then the bears may finally find some confidence and push a bit harder. They haven't been a potent force for quite some time, so they rarely are very aggressive. The bulls have had more failed bounces lately; another one would be a problem at this point.
We have a little early pressure and are badly in need of some energy and leadership to keep this uptrend going. Stock picking is quite challenging and it has been a tough slog. Uptrends these days just aren't causing much excitement.
The bulls have the edge, but it's a narrow one and can be lost easily if they don't move things along rather quickly.