The market did a great job today of shrugging off the previous day's ugly action on strong breadth and good point gains, but volume contracted on both the NYSE and Nasdaq, which is the first thing the bears point out.
Most notable, there wasn't any obvious reason for the market to do 180-degree turn. Yesterday, some Fed members sounded a bit hawkish, which was part of the excuse, but today the minutes of the last Fed meeting did nothing to make things clearer. The Fed is trying to figure out an eventual exit plan, but they really don't seem to know how or when that will occur. For some reason, the bulls were satisfied with that uncertainty today.
The pattern of the action has been increasingly inconsistent. We will have a few good days like today but then we suddenly have the sort of ugliness like we had yesterday. Every time we bounce, the bulls want to believe it is clear sailing going forward, but this market no longer operates like it did last the past few years. There is no reason to believe that today's momentum will be sustained.
There was some good action today and it was nice to see speculative action in junk stocks, but there's more work before this market shifts back into uptrend mode. Market players are anxious for a better market, so maybe they will keep pushing for a while longer, but the risk of a reversal remains very high. This market has not earned our trust.
Have a good evening. I'll see you tomorrow.
May 21, 2014 | 1:44 PM EDT
Crossing the Performance Gap
- Senior indices are still outperforming while small-caps lag.
Over the past week or so, some of the performance gap between the senior indices and momentum and small-caps narrowed. There has been slightly better action in a number of stocks that have lagged for more than two months as the DJIA and S&P 500 have hit new highs. There still is quite a sizable gap in performance, and today the senior indices have resumed their outperformance while small-caps in particularly are lagging again.
I continue to believe that this is not healthy and a signal that the corrective action still has a way to go. A healthy market is led by growth and speculative names. When defensive stocks are leading, it is mainly a function of mutual funds trying to find safe places to park money because they have no choice but to own stocks.
While the indices look good with all the green today, the trading is still extremely slow. There is some bounce action, but the chances that momentum will be sustained are very low. I'd really like to be more aggressive with my buying but it really is nothing more than minor countertrend action within a downtrend.
The Fed minutes are coming up and that may serve as a catalyst for the next move. Unfortunately, the risk of a downside reaction is probably higher than a positive reaction as the Fed has already made it clear that tapering is going to continue and that higher interest rates are not far down the road.
May 21, 2014 | 10:36 AM EDT
An Optimistic Mood
- But there's no obvious catalyst for today's reversal.
This morning's action is the inverse of Tuesday's action. Breadth is very strong and the indices are up sharply, however, there is no obvious catalyst for the reversal.
Yesterday, one of the negatives was comments from various Fed members. Today we have the Fed minutes coming up and Chair Janet Yellen is supposed to speak, and the market seems more optimistic for some reason. The Fed is obviously paving the way for interest rate hikes down the road, but the market is still going to react favorably if there are dovish comments to ease the pain.
Movement like this is not unusual within downtrends. The best bounces usually come in bad markets, and that can make for good trading, but the key is to make sure you don't start dwelling on the idea that the market is making a major turn. Countertrend bounces just can't be trusted for long.
I'm working on a few small trades but I still have a very hard time putting any substantial capital to work. Maxwell Technologies (MXWL), my stock of the week, has positive comments from Piper Jaffray and an increased target to $25. The chart still looks quite good, and I'll consider adding to the position later in the day if things hold up.
Some of the speculative solar stocks are moving and there is continued movement in junk names like NewLead Holdings (NEWL), China Ming Yang Wind Power Group (MY), Rediff.com India (REDF) and India Globalization Capital (IGC). It isn't quality merchandise, but it is keeping traders busy.
May 21, 2014 | 7:54 AM EDT
Reminder: The Market Is in a Downtrend
Momentum always lasts longer than we think is
"Patience is power. Patience is not an absence of action; rather it is "timing"; it waits on the right time to act, for the right principles and in the right way." -- Fulton J. Sheen
After a couple days of mildly-positive action, which boosted hopes that the market might be ready to turn back up, we experienced another classic failed bounce Tuesday. A little late strength took away some of the sting but there is no disputing how disappointing the action was on Tuesday.
The very negative breath was what was particularly troubling about the action. We had only about 1,530 gainers to about 4,150 decliners. Small-caps in particular saw bids dry up. But there was some slight relative strength in momentum names as the senior indices started to catch up with the corrective action in the broader market.
While it is clear that the market is still engaged in a downtrend. It is striking how anxious many market players are to declare that the worst is over. Many were ready to declare that we had seen the lows this past Friday and Monday when we had some minor strength. Already this morning there seems to be plenty of folks who are ready to dismiss Tuesday's poor action as just an aberration in otherwise healthy market.
One of the major lessons of the last few years was that momentum often lasts far longer than most people think is reasonable. Over and over, this market continued to run up despite the feeling that we had gone up too far, too fast and were in need of a rest. The market totally ignored what many thought was 'reasonable'.
We now have momentum moving in the opposite direction. And there is an even greater inclination to declare that we have moved enough in this direction and that it would be reasonable for a reversal to take place. The market always has a stronger bias toward upside action, so it isn't surprising that many are ready to battle this downside momentum. But the painful truth is that momentum, in both directions, almost always lasts longer than we think it will.
What ends up hurting people the most in a market like this is the natural inclination to anticipate that the worst is just about over. No one wants to think that this poor action is going to continue, so we start looking for positives and dwell on the good action when we can find some.
Everyone loves the idea of being fully-invested at the exact moment the market hits bottom but trying to accomplish that can produce some very ugly losses. People are much more prone to error on the side of being too early than too late. It is a function of trying to call bottoms. The only way you can call lows is by anticipating them rather than waiting until after the fact.
The most important thing to keep in mind is that when the market action improves, it will last for weeks or even months. There will be plenty of time to rebuild positions and to ride upward trends. Too often we rack up a series of losses as we try too hard to time exact turning points. Rather than focus on the overall trend we try to play the little intraday swings that occur and really have nothing to do with the overall condition of the market.
The key thing to keep in mind is that the market is in a downtrend. There will be countertrend bounces and other action that tries to draw us back in, but there is no rush to put our precious capital at risk too quickly.
The market stinks right now. Respect that fact and don't get caught up in all the blathering about when it will be better. It will eventually improve and when it does we will put some capital back in play and make some money.
Do some short-term trading if you are so inclined. But don't listen to the talking heads who want to tell you that the market is healthy and you should be buying. The price action in individual stocks is very poor and that is really all we need to know.