It was a peculiar day of action for the market. Good earnings from Google (GOOGL) helped to ignite a number of momentum stocks, but the NYSE had twice as many stocks trading down as trading up. Virtually every key sector, except for biotechnology was in the red and it was deadly dull in the middle of the day again before a strong finish.
Despite the mix of action, it was still a win for the bulls. The pullbacks were minor and the momentum in GOOGL was quite impressive. After the huge move over the past week, it actually is healthy to see some stocks pull back and digest gains. The bears will try to make something of the poor breadth, but while the selling was broad, it was not intense.
Next week the earnings reports really start to pour in. If this week is any indication, there is likely to be a positive bias. The moves in Netflix (NFLX) and Google (GOOGL) show how much of an appetite there is to chase stocks that post solid reports. You might argue that their valuations are stretched, but the buyers are unconcerned.
There's still potential for headline risk out of Europe and China, but the worries about an interest rate hike seem to have been forgotten. The macro picture looks better and the focus on earnings is a positive for traders.
It was a mixed day but the bulls are back in control. The goal should be to keep money in play and not be too defensive.
Have a great weekend. I'll see you on Monday.
July 17, 2015 | 11:01 AM EDT
Big-Caps Swim Against the Stream
- Market players chase Google, Netflix and a chosen few.
Strong earnings from Google (GOOGL) and Netflix (NFLX) have created a stampede into high-beta, big-cap names, but the broader market is struggling. Breadth is running nearly 2 to 1 negative, but stocks such as GOOGL, NFLX, Facebook (FB), Amazon (AMZN) and Priceline Group (PCLN) are being chased by market players anxious to put cash to work.
It is rather unusual to see the big-cap momentum names do so well when the overall market is trading in the red. GOOGL will sometimes march to its own drummer, but this time it is the broader theme of big-cap momentum that is working rather than an individual name.
The good news is that there is clear speculative appetite as market players try to put cash to work. There is a good chance that the action can broaden out again. It would be very unusual for the relative strength in big-cap names to stay this narrow. Market players are hunting for more buys and they will create some action as long as technical conditions stay positive.
The tough thing right now is that we either need to chase some huge moves such as GOOGL or we need to shift through quite a bit of slow action trying to find some good chart setups. If you don't like to chase strength, you are going to find very little to do right now.
I've cut back my position in my Stock of the Week, FB, but that continues to act very well as momentum players are anticipating that it could move like GOOGL into its earnings report, which is not due until July 29.
There is quite a bit of weakness under the surface today, and every major sector except solar energy is trading in the green. If it wasn't for big-cap momentum, this market would look quite different.
Make sure you manage your positions carefully and don't let some pockets of very strong action blind you to weakness in other things. It is very peculiar market action.
July 17, 2015 | 7:20 AM EDT
The V-Shaped Move Is Gaining Steam
- Many market players have a love-hate relationship with it.
"Repeat anything often enough and it will start to become you."
Six years after the market hit bottom in 2009, we are seeing the repeat of a pattern that has played out dozens of times. It is our old friend the V-shaped move, and it has been gaining steam, as macro worries slowly evaporate and some good earnings reports hit the news wires.
Many market players have a love-hate relationship with this sort of action. They are skeptical and untrusting of it, because it seems inconsistent with traditional beliefs about technical analysis and price action. On the other hand, if they embrace it, they can catch some pretty good momentum and the resulting gains compensate for the illogic trait of the action.
The S&P 500 is now up five of the last six days and has gained nearly 4%. A week ago it was looking like it was on the brink of breaking down through its 200-day simple moving average for the first time since October 2014. Some positive headlines out of Europe helped to produce an oversold bounce and, before you knew it, the action morphed into a V-shaped recovery.
These V-shaped moves typically come on lackluster volume and seem to totally ignore important overhead resistance levels. This move was no different. What was a bit different this time was that the catalysts were quite clear. Both Greece and China overcame some issues, Janet Yellen didn't say anything too surprising, and earnings season is starting off well, as it benefits from low expectations.
The key to navigating a V-shaped move is to simply ignore the market timers that can't resist the impulse to tell us why the move is doomed and that disaster awaits. They have great logic and ultimately will be proved correct one day, but they can't time things to save their lives. They seem to think that V-shaped moves are going to quickly fizzle out and turn into failed bounces, but they are proven wrong over and over.
Even if you ignore the market timers and learn to love the "V", the big challenge is that it can still be quite difficult to put cash to work. You have to be willing to chase, and if you don't like buying charts that are extended or overbought, you will miss some of the biggest moves.
Google (GOOGL), a holding of the Action Alerts Plus charity portfolio, is a classic example. The stock made a huge move and went straight up into its earnings report, which would suggest a possible "sell the news" reaction unless it absolutely crushed expectations. EPS came in less than 5% ahead of expectations, but traders were falling all over each other to chase it even higher.
There are plenty of pundits out there who are happy to tell us why chasing things like Netflix (NFLX) and Google is stupid, but what they overlook is that it simply is what happens in the context of V-shaped moves. This sort of market action favors buying stocks with strong momentum regardless of valuation, fundamentals or technical patterns.
The Nasdaq is gapping up on Google's earnings, but overall it is fairly quiet out there. V-shaped action always creates a big crowed of aggressive dip buyers that are frustrated at the lack of entry points. They don't want to chase a straight up move, but they are anxious over being left out and will jump in quickly on shallow pullbacks.
This sort of action causes many bulls to celebrate the big gains in the indices, but it causes much difficulty for those that want to put money to work and are looking for good entry points. Not being able to put money to work is not a good reason to be bearish in this market.