If you like consistency, you'll love this market. It was up for the 19th consecutive Tuesday, and 18 of the last 23 trading days. During this run, there was only one close lower than the prior day. Strong uptrends aren't unusual, but a month-long move with so little downside volatility is very rare.
I'm tired of writing that we need to respect the price action and stick with the trend, but there is no good alternative. Keeping up with this market is hard enough. Trying to predict a market top has been downright suicidal.
There was some softness in the underlying action. Breadth was positive and the market certainly bounced back nicely from the early selling, but the momentum felt tired and quite a few stocks I'm tracking are struggling.
While there were minor negatives, the biggest danger is letting your desire for a change in the action influence your thinking. I have to keep reminding myself that just because I would like variety in the action, it doesn't mean I am going to see it.
It is often said that the market will do its best to frustrate as many folks as possible. It seems to be doing a good job of that, even though the casual impression is that this is great action.
Have a good evening. I'll see you tomorrow.
May 21, 2013 | 1:22 PM EDT
The Most Hated Breakout Ever
- This lopsided action gives the perception of a fantastic market but creates a tremendous amount of frustration.
Even bulls are disappointed by the lack of weakness in this peculiar market. Virtually everyone agrees that we would have a healthier technical picture and probably attract more buyers with occasional pullbacks.
Lopsided action gives the perception of a fantastic market but it creates a tremendous amount of frustration for anyone who doesn't buy and hold. The media doesn't seem to understand this and just makes it worse with the celebratory tone.
I've heard this called the most hated breakout ever, which might be an exaggeration, but there is no question that an awful lot of market players are miserable. The funny thing is that most players are bullish and making money, but they don't feel good about it because they always feel they are underperforming this runaway action.
The way the market is acting today is a classic example. It sells off and actually breaches the prior day's lows for the first time in weeks, but rather than trigger sell stops and more profit-taking it immediately bounces straight back up and is back to the highs of the day. The dip was bought so fast and so completely, you can't help but think the computers were programed to do just that.
I'm doing very little. While the market tests the highs again, the momentum is tepid and breadth mixed. I'll keep looking for late buys but this market is doing very little to give us buying opportunities.
May 21, 2013 | 11:15 AM EDT
- I want to reset my thinking and it helps not to have as much inventory on hand.
There was a quick reversal to the downside this morning on chatter of breaking the streak of 18 straight positive Tuesdays. That statistic is so well known that it is a painfully obvious target for contrarians, whose thinking has not worked well in this market lately but obvious things are hard to resist.
I've been an active net seller this morning as I flipped some solar plays on news in Chinese solar chips. The group reversed hard and it was a good time to exit.
I also sold down many small plays that I've accumulated recently: ACADIA Pharmaceuticals (ACAD), Insmed (INSM), Himax (HIMX) and Noah Holdings (NOAH). The charts aren't bad but I find it helpful to clean up my portfolio after a good run. I want to reset my thinking and it helps not to have as much inventory on hand.
This market has consistently come back very fast from the sort of selling we are seeing this morning and with the Tuesday streak so prominent I would not be surprised to see a very good bounce attempt. But the selling pressure feels heavier and I'm a little more defensive.
May 21, 2013 | 8:29 AM EDT
Be Careful What You Wish for
- Don't let hopes for weakness prevent you from playing stocks that still have momentum.
When things are steep, remember to stay level-headed. --Horace
Once again we have a very quiet start to the day, which has been a good sign lately. We have not had a big gap in either direction since May 3 but that hasn't stopped the market from racking up substantial gains. Once it is clear that it is holding up, the buyers move in and that keeps the uptrend chugging along.
We had a little weakness yesterday in the major indices but under the surface there was good breadth, strength in small-caps and some frothy action in groups like solar energy. The bears will say that strength in speculative junk is an indication that this run is in a late stage, but none of their other arguments have worked so why should we listen to this one?
One of the most fascinating and frustrating things about the recent action is how none of the bearish indicators or arguments have worked. The bearish fundamental arguments have been ignored all year but the degree to which technical indicators are ignored has caused many traders to be overly cautious.
Being disciplined and prudent has been a major disadvantage in this market. If you have a methodology that requires locking in gains as stocks become extended you have ended up selling way too early. I tend to make partial sales of positions into strength and that has left me very underinvested as stocks keep running up.
In a "normal" market, we usually have pullbacks and consolidation along the way so that cash can be redeployed. In this market, things never seem to take the time to setup again, which has resulted in a crowd of overanxious and very aggressive dip buyers who jump in on minor downticks.
As I've often written, strong markets tend to be sticky to the upside. While things may look a little slow, I'm not anticipating substantial weakness. The best thing this market could do is churn and consolidate for a while and it didn't hurt that one of the most dovish Fed members, Charles Evans, made comments about how the economy appears to be doing well. That raised concern about continued QE and if anything spooks this market, that does.
The big danger is letting our desire for consolidation and pullbacks push us to be more anticipatory looking for downside. Personally, I would very much like to see weakness so that we'd have new opportunities, but I have to be careful not to let that wish prevent me from playing stocks that still have strong momentum.
We are definitely walking the high-wire but there is still money to be made by staying with momentum, although it seems to be at very lofty levels. The way to do that is to be extremely vigilant and highly reactive. If a trade falters, dump it first and ask questions later.
We all know that this market is going to see a correction sooner or later, but the biggest mistake all year is to keep on anticipating it and missing out on the positive action. Try to suppress your desire if you want weakness and stick with the trades that still have momentum. A change in market character will come but focusing on it is a great hindrance to effective trading.