The indices managed another day of slightly positive action -- but it was an odd brew of action. Money moved from speculative names into "safer" stocks such as Intel (INTC), Hewlett-Packard (HPQ), Disney (DIS), PepsiCo (PEP) and Microsoft (MSFT). In addition, banks jumped on the Bank of America (BAC) settlement and small-caps were jerked around by program trading.
The biggest negative was that the speculative trading, which we have been enjoying for a while, cooled off with many China names reversing and fewer small stocks being pursued by the hot money. Big-cap momentum names were mixed with recent leaders like Bitauto (BITA), Tesla (TSLA) and Puma Biotechnology (PBYI) coming off their highs. Biotechnology was also weak, which is another illustration of a shift away from higher-risk stocks.
The rotational action may simply be positioning in front of Fed chief Janet Yellen's Jackson Hole, Wyo., speech at 10 a.m. EDT tomorrow. Market players still want exposure but want to reduce risk by shifting to conservative names.
This sort of rotational action has occurred twice already this year and ended up hurting many secondary stocks as it played out. The senior indices cover it up, but one of the big reasons that the average hedge fund is only up 1% this year is because stealth corrections have hit them hard.
Jackson Hole will be the focus tomorrow and, after seven straight years of producing positive action, expectations will be positive.
Have a good evening. I'll see you in the morning.
Aug 21, 2014 | 1:01 PM EDT
Erring on the Anticipatory Side
- I've given back too much after a similar runs.
The overall market isn't doing much again, but small-caps are being jerked around and have bounced big following some sort of programmed selling. Breadth on the Nasdaq is now even, but speculative action seems to be cooling.
China Finance Online (JRJC) and Mandalay Digital (MNDL) are running, but there is weakness in biotechnology, China-related names and some big-cap momentum plays. It isn't major selling so far, but it is enough to push me to clean out my portfolios a bit and raise a little cash.
There have been some good gains lately, and twice this year I've given back too much after a similar run. There is a fine line between being anticipatory and being prudent when it comes to selling, and I'm erring a bit more on the anticipatory side this time.
Janet Yellen's big speech is tomorrow morning, and it may be the catalyst that sends this market even higher, but the action in individual names makes me a little more cautious. I'm still happy to do some buying, but the technical action isn't producing many new candidates.
Aug 21, 2014 | 10:38 AM EDT
A Good Reason to Be Defensive
- Market players worry that the Fed chief may turn hawkish.
Strong economic reports have triggered worries among market players that Fed chief Janet Yellen may be more hawkish when she delivers her speech on labor markets at Jackson Hole, Wyo. Interestingly, European stocks rose on poor economic news because of hopes for a new stimulus program from the European Central Bank.
Part of the problem in the U.S. is that the market is a bit stretched to the upside on light volume after the recent run. Market players are more likely to embrace a reason to sell in this environment, and that is why the good Philly and housing numbers are being sold.
There is nothing seriously wrong with the action, but it is worrisome that small-caps are lagging so badly again. Consequently, Nasdaq breadth is better than 2 to 1 negative with no major sector strength.
The saving grace of the market lately has been pockets of good speculative action in China Finance Online (JRJC), Sky-mobi (MOBI), Mandalay Digital (MNDL) and a few others, but that interest is narrowing.
I added to a position in BioFuel Energy (BIOF) this morning, but I have been a net seller so far. The China stocks in particular look like they are starting to roll over after the poor economic news in China overnight. Stronger defense is warranted.
Aug 21, 2014 | 7:54 AM EDT
Jackson Hole Watch Begins
- It's slow going; we're all waiting for the meeting.
"We did the right thing ... I hope."
The Jackson Hole conference, which starts today, is of particular importance because it has been used as the platform to announce the most significant Fed action in the past decade. In 2010 Ben Bernanke announced the Fed's QE2 program there; in 2012, QE3 was announced at the same venue.
The big question today is whether Janet Yellen will use the opportunity to make a major policy announcement. If she does, will she take a more hawkish stance? And if she does that, will the market care?
For years now, the bears have been convinced that a market collapse will occur once the Fed winds down its QE program and starts to raise interest rates. They have been anticipating this event for so long it has become almost meaningless, and the market still seems to be unconcerned that the Fed will start to shift. Yesterday, when the minutes of the last Fed meeting indicated more hawkish than had been assumed by many, we sold off for 15 minutes and then rebounded and made new intraday highs. The market simply wasn't ready to worry about this issue right now.
It is certain that a day will come when the market has a negative reaction to what the Fed is doing. We've enjoyed endless support for years now, and the old adage about not fighting the Fed has been the single best piece of advice you could follow. Many market players have forgotten that the old saying works both ways and that when interest rates do start to rise, they will create a headwind.
Like all things in the market, the key is timing; there are an awful lot of folks who have grossly underestimated how long the Fed will be supportive of the market. Will today be the day that Janet Yellen sparks a change in the market mood?
I'm not betting on it, but technically the market is ripe for some selling. We haven't had a good excuse for selling since the last Ukraine flare-up. We are technically extended on light volume, but the bulls keep pushing and there continues to be a strong bid under the market.
Ironically, both Europe and China have been signaling that their economies are still struggling and that the central banks may need to provide additional stimulus. That is helping to hold stocks up and may also prevent Janet Yellen from being pushed into a more hawkish stance.
The likely message out of Jackson Hole will be that there is still much softness in the economy and the jobs market in particular but the Fed is staying vigilant and will act as needed. That message has been fine with the market for a while now. But as the timing of interest rate hikes becomes more concrete, the potential for a negative market reaction will grow.
The Fed has provided market support for many years now and there is no reason to believe that will come to an end today. However, it is inevitable that things will eventual shift. Our job is to make sure we stay in tune with the market and react as the character of the action shifts.
We have some minor strength in the early going; but it's slow going as we await some news from Jackson Hole.