For a second straight day the market opened soft and then gained traction. The gains weren't anything spectacular, but the consistent buying was impressive. What was most notable today was that the small-cap indices outperformed while the DJIA lagged. I find that inexplicable; perhaps that's the way the computers were programmed to operate today.
A number of market pundits, most notably Dennis Gartman, were looking for the 9/11 anniversary to produce a terrorist scare. When nothing happened, that probably prompted short covering and helped produce a close near the highs of the day.
Despite the generally good action, momentum remained tepid. A few weeks ago, the high-beta stocks, China names and small-caps were leading this market higher. Those groups aren't acting nearly as well, but they haven't collapsed either.
My major concern now is that worries about a more hawkish tone form the FOMC meeting next week will act as a catalyst for another pullback. Given how well this market has bounced back for two straight days, that may be unduly pessimistic. But the action in individual stocks has cooled off enough to make me feel a bit more cautious. On the other hand, it might be the cold that's bothering me.
Have a good evening. I'll see you tomorrow.
Sept. 11, 2014 | 1:25 PM EDT
I've raised quite a bit of cash as a result.
I often comment that it is better to react to market action rather than anticipate what will happen, but that isn't as easy as it sounds. If you react to every little pullback, you will constantly be shaken out of the market, but if you are too slow to make a move when things start to weaken, your losses can grow quickly. The current situation is a good example.
After the selling Tuesday, the indices have recovered pretty well but breadth has lagged and the pockets of momentum have narrowed. We are still seeing good dip buying, but the buyers lose energy once the market gets back to even. Some reactive traders wouldn't be too worried about this action. The underlying support is still quite solid and the selling isn't particularly aggressive.
I don't feel as comfortable with the action and have raised quite a bit of cash as a result. There aren't as many stocks acting as well and the stocks on my momentum lists are very mixed. The bulls don't want to give up, but they are not pressing as hard. That sets the stage for more aggressive selling as the upside continues to sputter.
It always comes down to individual stock picks, and right now there just isn't very much to buy. You have a few momentum plays like Twitter (TWTR) and RadNet (RDNT), but it is becoming very thin and that is a good reason to build up cash.
Sept. 11, 2014 | 10:51 AM EDT
Skeptical of Upside
- I'm not sure the bulls have the juice to push things higher
An open like we had this morning produces reflexive dip buying. Buying a gap down open has worked so consistently and so often that the buyers don't even think about it these days. They immediately jump in and the early lows occur in the first minute or two of trading.
We've had a pretty decent bounce this morning, but I continue to be skeptical of further upside. Breadth has been softer lately and is running 2,050 gainers to 3,150 decliners at the moment. We still have a few momentum names like Palo Alto Networks (PANW) and Mobileye (MBLY) that are keeping the hot money entertained, but it has been much narrower lately and some of the thinner small-caps are having issue.
The market still hasn't done anything wrong, but I'm concerned that momentum is slowing and that the potential for some sharper dips is increasing. The bears will have some ammunition in the form of worries about the FOMC meeting next week. While those worries have proven to be needless so far they do make the market a bit nervous and skittish at times.
I've raised my cash levels substantially this week and may have to scramble to put money back to work if we start running again, but I simply don't see much I feel compelled to buy right now. I've added some minor buys to positions in Mandalay Digital (MNDL) and Taser (TASR), but it looks to me like we have a high risk of rolling back over as the day progresses. The bulls are doing a good job, but I don't think they have the juice to push things much higher.
September 11, 2014 | 7:51 AM ET
Fed Chatter Heats Up
- But the dip buyers are still out there.
Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof. --John Kenneth Galbraith
On Tuesday the explanation for some weak market action was concerns over a more hawkish Federal Reserve. On Wednesday those worries were forgotten, and the market bounced back a bit. Given next week's fast-approaching Federal Open Market Committee meeting, talk about the potential for higher interest rates will likely be the key market driver.
We have a number of other things in the headlines. They include fact that today is the anniversary of the Sept. 11, 2001 terrorist attacks, President Obama's speech last night, the strength of the U.S. dollar, the weakness of oil, the poor European economy and the endless coverage of Apple (AAPL) products. While all those issues and many others are keeping the folks in the media occupied, the only things that really matter to this market are the Fed and interest rates. You can be sure that, when we finally do see some sustained downside action in the indices, it will be attributed to the central bankers.
For years now, the bears have been anticipating that a more hawkish Fed and higher interest rates would be the catalyst that would finally put a top in this market. They have been dead wrong, and their poor timing has carried a very heavy cost. However, the logic of the argument is hard to dispute. At some point we will no longer have the same access to easy money, and that is going to impact demand for stocks. The bulls believe that a stronger economy will offset the higher rates, and they often mention that the market has done well when rates trended upward in the past.
No one is going to be able to precisely call a top in the market. However, you can be certain it will occur in conjunction with a shift in feelings about the Fed. That is what we need to focus on, and with the FOMC meeting taking place next week, the potential is high for some increased market volatility on worries about a more hawkish Fed.
The dilemma for market timers has been that it has been so foolish to try to anticipate a less market-friendly Fed. It seems obvious that this has to occur eventually, but the bears constantly underestimate how slow the economic recovery really is and how poor things are going overseas, particularly as it regards Europe.
The solution to this problem lies in forgoing any attempts to time the market based on macroeconomic concerns -- and, instead, to stay focused on the price action in individual stocks. That is what the most successful investors and traders are doing these days.
At some point the Fed will matter and stocks will turn. The best way to time that shift will be to watch the price action in stocks rather than paying undue attention the headlines.
We're looking at some market softness this morning as chatter about the Fed heats up again. The bounce Wednesday lacked momentum, and it is hard to do much new buying, but the market still has good underlying support and there isn't any major technical damage. The dip buyers are out there, and that is the key to the market right now.