Whenever we have weak action like today, the bears are quick to proclaim that a top is in and substantial downside lies ahead. In view of how little success the serial top-callers have had, it isn't too surprising that they are quick to embrace the first sign of weakness.
But in the bigger scheme of things, it was meaningless action. It has been a couple of weeks since we've had any downside and we certainly could use some consolidation. The market can easily afford further downside. In fact, it would be a positive if it pulls back and shakes out the complacency.
It can be very tempting to go quickly to cash at the first sign of any weakness, especially if you have been riding the trend but worried about a top. I've been preaching a reactive approach to this market, but the danger is that you overact when nothing much has really changed.
What I found most worrisome today was that the high momentum stocks lead to the downside. They have been extremely strong lately as the broader markets meander, so it is a slight change in character to have Facebook (FB), Tesla (TSLA) and Apple (AAPL) weaken. Momentum cuts both ways, and when it dries up things can fall very fast.
I'm not making any market call, but I am mentally preparing for a change in the action.
Have a good evening. I'll see you tomorrow.
Aug. 6, 2013 | 12:33 PM EDT
Staying Ready in a Lackluster Market
- Watch for signs that the downward pressure is increasing.
It is often said that we shouldn't short a dull market, but it looks like the slow trading is leading to some profit-taking today. Breadth is poor, with just 1,300 gainers to 4,100 decliners, and the high-momentum stocks in particular are seeing some pullbacks. Volume is light, and there aren't any signs of panic, but the feeling is that maybe the dog days of summer are going to cool the market off a bit.
The big dilemma in this market is that if you are too quick to react to weakness, you will often find yourself sitting on the sidelines with too much cash as the market comes right back. The dip-buyers just haven't let stocks come in much before they go to work.
What we have to watch for now is further narrowing in the leadership. Over the past couple of weeks, the indices have been fairly sedate, but under the surface, the momentum action has been extremely strong. If we start to lose the momentum, I'll want to tighten up very quickly. We also have to keep an eye on the small caps. There has been pretty good stock-picking in the smaller names, but this is a group that is going to see bids disappear quickly if money starts to move aside.
There are a few negatives out there which may just be a function of slow summer trading, but we have to stay vigilant and watch for signs that the downside pressure is increasing.
I'm a net seller, and if we are weak in the final hour of trading, I'll be dumping more positions.
Aug. 6, 2013 | 08:12 AM EDT
Painfully Slow out There
- The best advice I can give is to keep on grinding out the trades.
"To do a dull thing with style -- now that's what I call art." -- Charles Bukowski
The month of August is the peak time for Wall Street vacations and is always slow, but it feels even duller than usual right now. Part of that is due to the fact that we have had such a huge move since late June and are badly in need of some rest and consolidation but it also feels like many market players are tired of trying to navigate this one-way action that is challenging for both bulls and bears.
What has been the most interesting characteristic of the market lately is how strong some of the favorite momentum stocks have been while the broad indices are fairly quiet. We still have good underlying support, which is keeping the indices positive, but the only real action is occurring in names like Tesla (TSLA), Apple (AAPL), Facebook (FB) and the like.
If you aren't in the hot momentum names, you are missing out on most of the action. But there also is some good action for stock pickers. For example, stocks I've mentioned recently like LightInTheBox (LITB) and Acadia Pharma (ACAD) made strong moves yesterday. But the number of stocks hitting new highs has slowed a bit and the market is becoming narrower.
The bears are still trying to anticipate a top in this market, but if that is your focus you are missing out on some good action in individual stocks. If you really want to time a top in this market, I suggest watching the leading momentum names. When they slow down and start to roll over, the hot money will move to the sidelines quickly.
If you enjoy sensationalism it is not bad time to make some loud and dramatic market timing calls, but if you are trying to make money it is better to keep on grinding it out with some long-side picks. The bulls that have stuck with this market trend are building a huge cushion that will leave them far ahead of the anticipatory bears when a correction does finally come.
Right now, it is painfully slow out there and it is easy to overthink what is going on. The best advice I can give is to keep on grinding out the trades and don't think much about timing. Stay vigilant and watch for a change in the action, but don't anticipate it.
One of the toughest things about the market right now is that many traders, including me, would really like to see some selling in order to shake things up. It is easy to let that hope color the way you approach the market. The folks who are doing the best are the perma-bulls who have no doubts about how great things are. They will be burned at some point, but they are looking pretty smart right now.
We have a slightly soft open and little news flow. Stay focused on individual stock picking.