The bears are convinced that a day of reckoning is coming but, so far, their timing stinks. The market continues to work slowly higher. Dip-buyers are under the surface and the action in momentum names and small-caps is very good. Yes, the volume in the major indices is light, but there has been little correlation between volume and sustained upside for a few years.
What is really killing the bears is that they have had some good macro arguments, such as the mess in Iraq and the mediocre economic numbers, but it just hasn't had any impact. Every time we start to dip a little, buyers are waiting to jump in. We even have good old-fashioned momentum in names like Netflix (NFLX) and Tesla (TSLA) again.
Tomorrow is the Fed's interest rate decision, which is going to give the bears more ammunition, but it has been a very long time since we've had any major downside on Fed day. The market knows the economy is still fragile and central bankers are in no rush to raise rates and, ultimately, that is all that matters.
I don't want to sound too upbeat, but there still are no major negatives. You can concoct some contrarian worries if you like, but the price action is solid and that tells us the real story of the market.
Have a good evening. I'll see you tomorrow.
June 17, 2014 | 1:29 PM EDT
Still Churning Higher
- Counting on a sell-the-news reaction has not been a good bet.
For the third straight day, early weakness is bought and the market continues to churn higher. The gains and breadth are even better than yesterday's, and that seems to be causing even more frustration for the top-calling bears and the underinvested bulls. Both sides would love to see weakness -- which is probably why we aren't seeing any.
The big hope for the bearishly inclined is that we have some sort of sell-the-news reaction to the Fed interest rate announcement tomorrow. Unfortunately, for our ursine friends, that is one of those quaint ideas that seldom seems to apply for very long. Volume doesn't matter, the market makes V-shaped recoveries and no one sells news even when the market is up and it is highly anticipated.
We are seeing a little choppiness in the trading today, which is primarily a function of short-termers flipping for quick gains. But I see no reason to try to call a top in small-caps like my friend Doug Kass, who is now "all in" short. There is still too much positive action to anticipate a major top of any sort. We need at least some price weakness before I'd be inclined to be negative about the market.
Of course, differences of opinion are what make a market, and there is more than one style that works. My style is to try to stay with the trend as long as possible and not anticipate problems until there is evidence in the form of price action. We may be a bit extended, but I see no other reason to believe we will fall apart. The Fed could be a catalyst for selling, but counting on a sell-the-news reaction has not been a good bet.
June 17, 2014 | 10:22 AM EDT
Bear Killers Are on the Hunt
- Speculative buyers are hungry for action.
We have bear-killing action this morning as weakness following CPI and home-sales data is bought and markets move into positive territory. Breadth is running around 3,100 gainers to 2,000 decliners, but momentum names Netflix (NFLX) and Tesla (TSLA) are driving the action. Speculative buyers are hungry for action and keeping support under the market.
We have leadership this morning in my favorite tandem of biotechnology and solar energy. Solar is looking particularly good with my top picks, SunEdison (SUNE) and SunPower (SPWR), moving along nicely. My stock of the week, VASCO Data Security International (VDSI), is basing well and I'm watching for a move over $12.40 to bring in the breakout chasers. Horizon Pharma (HZNP), last week's stock of the week, is coming back to life.
As I discussed in my opening post, there is a big wall of worry, but many of the "old-school" Wall Street folks aren't seeing it. They fail to understand that the individual investor is still very slowly coming back, and far too many bulls have remained underinvested. There is too much cash chasing too few stocks, and that is what drives this market.
I'll be looking for more buys. The easiest mistake is to keep thinking this market can't keep running.
June 17, 2014 | 8:28 AM EDT
A Classic Wall of Worry
- And the worry is the fear of being underinvested.
History says the greatest bull markets climb the wall of worry. There's always these things you can worry about to keep people out. . . . When no one has any worries, when there's no clouds on the horizon that's when I want to get out of the market. --Dr. Jeremy Siegel, Wharton School of Business, University of Pennsylvania
Although the indices managed only very minor gains on Monday, the tone of trading under the surface was quite upbeat. Momentum stocks, led by Tesla (TSLA), continued to attract interest and outperformed substantially. In addition, speculative small-caps produced good relative strength.
A couple months ago, these groups were struggling as defensive big-caps held the senior indices aloft. The media was celebrating, although the action under the surface was quite poor. We now have the opposite situation. On Monday the folks on television were informing us that the situation in Iraq was keeping the market contained. But the reality was that it was a good day for speculative action, and the market is acting much better now than it had been a few months ago, when the media was breathless with excitement over new highs for the Dow industrials.
While the action is quite positive, the big question we are about to confront is whether the market will use Wednesday's Federal Open Market Committee interest-rate decision as an excuse for some profit-taking. The International Monetary Fund informed us that economic growth in the U.S. will only be 2%, which means rates can stay low for longer than some investors expect. On the other hand, a survey of economists by Bloomberg suggests that the Federal Reserve may actually raise rates more quickly than many money-market investors expect it to do.
Basically, there really isn't much clarity about how quickly interest rates will rise, and that means there is potential for a strong market reaction to an incremental news about rates. Right now the attitude is quite sanguine, and the Fed doesn't seem inclined to disrupt that sentiment, but the next major market move is very likely to be a product of what the central bank has to say about the potential for tightening down the road.
Since the Fed announcement is set for tomorrow afternoon, some positioning may begin in front of the news today. The bears will be hoping and praying for some "sell the news" action -- and, given that the indices are a bit extended, and that many folks are anxious to lock in some gains, this certainly is a possibility.
Although the bears keep arguing that sentiment is too bullish and too complacent, the truth is that we're looking at classic "climb the wall of worry" action. The worries don't entail the big-picture concerns, such as the crises in Iraq and Ukraine. Instead, investors fear being underinvested as the market keeps on climbing. The strongest driver in this market is the desire to put idle cash to work. The higher the market goes, the greater the inclination to do just that -- and the more cash that is put to work, the higher the indices go. In turn, there is even greater desire to put even more cash to work.
As soon as the bears figure out that the bulls are still underinvested, they'll have a better chance of understanding the dynamics that are moving this market.
I suspect we will see some nervousness about the Fed and the potential for some hints about when rates are likely to rise. On the other hand, the economic recovery is still one of the worst since the Great Depression. The market has been fond of this, as it has kept the central bankers engaged.
A slightly positive open is on the way, and there isn't much market-moving news. Stay focused on stock-picking and manage your trades carefully.