The early stages of a V-shaped bounce?
While it was a slow summer Friday with light volume, the market action looked like the early stages of yet another V-shaped bounce. Most notable was the momentum-chasing. Tesla (TSLA), Facebook (FB), Netflix (NFLX) and a number of names that have led the market in recent months attracted aggressive buyers who seem to have little fear that a bounce could actually fail.
The main driver for this move was the sharp decline in interest rates, which you can see clearly in the chart of the ProShares UltraShort 20+ Year Treasury Fund (TBT). The downward pressure on rates was probably a product of the weaker-than-expected new-home-sales numbers this morning. But it was also probably driven by the fact that the market is starting to discount the news. Tapering of bond-buying is inevitable, and the market is starting to accept it as the natural progression of events.
Technically we are not out of the woods, but the action is very similar to the way other V-shaped bounces have started. The longer we stay strong, the more the folks holding cash worry that they are going to miss another straight-up move.
As I stated this morning, we need to give the bulls room and focus on stock-picking rather than big-picture market timing. There is unusually strong action in a number of stocks that isn't reflected in the indices.
Have a good evening. I'll see you on Monday.
Aug 23, 2013 | 10:34 AM EDT
Stick to Stock-Picking
- Focusing too much on the indices is a mistake.
We had an optimistic start this morning as traders ignored the media preoccupation with Thursday's Nasdaq failure and Microsoft (MSFT) surged on news CEO Steve Ballmer is finally stepping down. Unfortunately, the biggest miss in the new home sales number in three years is putting pressure on the market as players wonder if higher interest rates really may not be such a good thing.
The best thing about this market continues to be the strength in big-cap momentum names like Tesla (TSLA), Facebook (FB), Netflix (NFLX) and LinkedIn (LNKD). The hot money continues to be more worried about being left out than a reversal.
The bulls argue that even though the indices don't look healthy, there is great trading in individual stocks. Market players are still hungry for buys, which more than outweighs other negatives.
I'm still sitting on quite a bit of cash but I'm interested in adding to names such as FB, NOAH Holdings (NOAH), BioTelemetry (BEAT), Sarepta (SRPT), Alliance Fiber Optic (AFOP) and NQ Mobile (NQ). I am managing things tightly and don't feel the need to chase, but am slowly inching into a few stocks that look technically healthy. Focusing too much on the indices has been an easy to mistake all year.
Aug 23, 2013 | 8:05 AM EDT
Give the Bulls Some Room
- Let's see what they can do today.
We are stuck with technology when what we really want is just stuff that works. --Douglas Adams
Despite the drama over the Nasdaq shutdown Thursday, the indices have found support and are putting together a decent oversold bounce. The big question is whether this bounce turns into yet another V-shaped move back to recent highs or is this just an opportunity for trapped bulls to escape and bears to reload shorts.
What makes it particularly tricky is that this is one of the slowest periods of the year, as Wall Street takes summer vacation and negative seasonality kicks in. August and September are typically the worst-performing months of the year, and we all know that October is when the big crashes have tended to occur.
Although both the technical picture and seasonality are flashing warning signs, anyone who has paid close attention to this market is keenly aware of how often it comes charging back just when it looks like it is on the brink of destruction. I don't know how many times the shorts have been squeezed and underinvested bulls panicked when a low-volume, oversold bounce just kept going.
The bears will argue that this time it is different because what is causing the pressure is concern about a less-dovish Fed. The market is discounting the likelihood of tapering in the next few months and is trying to figure out how to deal with a stronger economy and a less-accommodative Fed.
The bears have been telling us for years that the market would suffer greatly once it lost Fed support and interest rates started to climb. We haven't really lost much Fed support so far, and the market is still seeing very good underlying support.
The biggest positive is that good speculative support has continued. Stocks like Tesla (TSLA), Apple (AAPL), Baidu (BIDU), Netflix (NFLX) and LinkedIn (LNKD) are still attracting the hot money, and momentum investors continue to beat the bushes looking for opportunities. There is little fear and still plenty of dip-buying support.
Some bears will argue that the bulls are too complacent, which suggests more downside to come, but that has been the case for quite some time and it has had little impact. This market has produced massive underperformance by funds and active managers and they are constantly looking for entry points on weakness.
The slowness of trading is going to make it difficult, and the technical picture isn't very good, but the market has a tendency of doing fine in a setup like this and I'm going to give the bulls a little room to see what they can do. Focus on stock-picking and don't get too caught up in the big-picture stuff and we should be able to make money.