Thursday's bounce following the gap-down open used up quite a bit of buying "juice" and the bulls are having a much more difficult time this morning. The fact that many plan to head out early for the long weekend is keeping some money parked on the sidelines. On the other hand, dip buying has worked so well for so long that support can kick in at any time.
Breadth is quite poor in the early going at better than 3:1 negative with biotechnology, oil and homebuilders under pressure. The hottest group in the market remains solar energy. That is where the hot money is flowing. Key names in the group to trade are SolarCity (SCTY), First Solar (FSLR), JA Solar (JASO), Yingli Green Energy (YGE), JinkSolar (JKS), Canadian Solar (CSIQ), SunPower (SPWR), Trina Solar (TSL), MEMC (WFR) and Real Goods Solar (RSOL).
I expect the solar theme to continue for a while and I'll be watching closely for trading opportunities. These theme plays often last much longer than I think they will. Solar energy has always been a good group for traders, which means they are likely to stay active and offer good opportunities on pullbacks.
My wife is having surgery today for a broken leg, so I'm heading out. Do something fun this weekend. I'll see you on Tuesday.
Manage Your Positions
- Raising cash to be more opportunistic is not a bad idea.
One thorn of experience is worth a whole wilderness of warning. -- James Russell Lowell
The bulls did an excellent job Thursday of bouncing the market back up after a poor start, but there is renewed pressure this morning due to a mediocre bounce try in Tokyo on continued worries about economic slowing in China.
Yesterday, U.S. markets continued the pattern of immediately forgetting any recent negatives. The market was spooked by comments that the Fed may taper off its bond buying and also by the poor action overseas. It looked like we finally were going to put a decent dent in the trend that has been running all year, but the buyers showed up at the opening bell and by the end of the day we just had minor losses.
Given how often we have immediately come back from pullbacks, it isn't too surprising that we bounced like that. It is almost reflexive to buy early weakness. Buyers have no real fear that this market is going to fall apart. They know they Fed is not going to stop quantitative easing any time soon, so when we do sell off, they jump in because they know sooner or later one of the Fed members will make dovish statements again.
The wild volatility in Japan, where the Nikkei swung up and down around 3%, is causing some nervousness this morning. Japan has seen massive action by its central bankers and it lit a fire under its market. Now there are concerns that the aggressive easing is the simple solution and it is causing violent reactions.
In the U.S., the bulls really aren't worried very much, so far. They don't like these comments about the Fed reducing its bond buying in the near future, but there is no real concern that the Fed is about to abandon its low-interest-rate policies.
Many market players would even say that the selloff on the Fed comments is bullish. We needed an excuse for some profit taking and now we have it. We were clearly technically extended and things were becoming a bit frothy. A pullback here gives us a little skepticism and negativity, which are important ingredients for more upside.
While some weak action isn't a bad thing in the bigger scheme of things, there was still some ugly action under the surface that required that we take some defensive steps. Many of the recent leaders stumbled and the losses can mount fast if you don't manage your positions.
Raising cash so you can be more opportunistic as things develop is not a bad idea. Too often market players will remain frozen when the market becomes volatile out of fear that they will sell at exactly the wrong time. More often than not, even if a sale is poorly timed, another good opportunity will come along. If you err on the side of selling, it is not a hard problem to fix If you simply sit and do nothing, it is much more difficult to repair the damage of lost capital.
The mood of the market has changed a bit, but we haven't yet really had a major breakdown. It looks like we are undergoing a topping process now, and that means increased caution. But the resilience of the market is something we need to respect.
Keep in mind that a Friday in front of a long weekend often has a positive bias, but the second gap down in a row is not going to be quite as easy to buy as the first one.