During the month of August, poor action in the Dow Jones Industrial Average covered up strength in a number of momentum stocks such as Facebook (FB), Tesla Motors (TSLA) and LinkedIn (LNKD). Today, just the opposite occurred. Very strong action in the DJIA helped to hide some very poor action under the surface.
Facebook, for example, had its worst day since May, with a loss of more than 4%. Facebook wasn't the only stock that performed counter to the highflying Dow. Apple (AAPL) was hit hard, and a wide variety of high-momentum names pulled back sharply. Overall breadth on the NYSE was almost 2 to 1 positive, while it was close to flat on the Nasdaq. This tells us that technology stocks were the main weak spot today.
This sort of action is a non-confirmation of the new highs that were made today, and it raises some red flags. I'm hesitant to be too negative too fast, but there were clear indications that some folks are nervous about the upcoming Fed interest rate announcement, especially since many stocks have been somewhat frothy lately and in need of a rest.
Overall, we still have positive technical factors in place, but the underlying action was problematic. When the high-momentum names underperform, it is often a sign of what is to come for the broader market. I took a few defensive steps today, but at the end of the day it clearly was not enough. I'll be managing things much tighter in the next couple days. Have a good evening. I'll see you tomorrow.
Sept. 16, 2013 | 1:45 PM EDT
Grab Some 5-Hour Energy
- Momentum has completely dried up.
Today's action is peculiar. After a frenzied open, the market has gone dead. It is still holding on to most of the gains, and breadth is solid with 3,900 gainers to 1,500 losers, but most stocks are off their early highs and if you sold into the open, you can probably buy back cheaper.
Momentum has completely dried up. Over the past couple of weeks, we saw almost the exact opposite action. The indices were doing very little but individual stocks, momentum names in particular, were strong. Today, the indices look great but the action in individual stocks is limited.
What has been striking over the past week or so how is how quiet the trading action has been. I expected things to pick up after summer vacations ended, but it feels like the level of disinterest has actually increased. It is surprising because the trading action has generally been good.
We'll see if the buyers perk up as the close approaches, but right now it looks as if they are falling asleep. The market is in good shape technically and we aren't seeing any real selling, but we could use one of those five-hour energy drinks, or maybe a double espresso, to liven things up.
Sept. 16, 2013 | 10:23 AM EDT
Waiting for the Dip-Buyers
- How much selling do you do into this sort of open?
These big Monday morning gap-up opens are not easy to navigate. If you are a disciplined trader, as opposed to an emotional one, you really can't do much buying. There might be a few opportunities for decent entries but, generally, you have to wait until things calm down and we find support.
The more difficult question is how much selling do you do into this sort of open. In the old days, when the market moved because more humans were involved, I'd be more inclined to be aggressive with my sales. But with so much underlying support from dip-buyers, you don't often get a chance to remount stocks that you have sold.
Nonetheless, I've sold down a few stocks, like NQ Mobile (NQ) and Facebook (FB), and I will watch for chances to add shares back. My stock of the week, Zhone Technologies (ZHNE) is working well so far, but as far as any new buys, I'm just going to wait and see if and when the dip-buyers show up.
So far, we are going straight down from the open and underinvested bulls aren't showing any great anxiety.
Sept. 16, 2013 | 8:13 AM EDT
Caught Off Guard
- Larry Summers' sudden Fed withdrawal produces a squeeze.
With low expectations, it's very easy to surprise people. --Pamela Anderson
If there is any doubt about how much the Federal Reserve influences the stock market, it should be put to rest this morning as we have an absolute frenzy following the news that Larry Summers has withdrawn his name from consideration as the next chair of the central bank. It was widely perceived that Summers was more hawkish than most and was not as supportive of quantitative easing as the other likely candidate, Janet Yellen.
The news has caught many by surprise and is producing a substantial Monday morning squeeze. Many market players are out of step as they were anticipating some sort of pullback after the market became increasingly overbought last week on light volume. Big-picture bearishness has been building and many pessimists were anticipating a payoff this week.
In particular, many bears were anticipating that the FOMC rate decision, which is due Wednesday afternoon, would contain the first step in the much-anticipated tapering of bond-buying. No one is expecting a major cut in the level of buying at this point, but the bears' argument is that this the beginning of the end of quantitative easing and that it will be a market negative.
Typically, a wild open like this will attract traders anxious to "fade" the frenzy. The thinking is that flipping, profit-taking and aggressive shorting will produce a quick reversal, especially since there is a good argument that this is an overreaction to the Summers news.
The big problem for folks who want to sell the big gap is that this sort of thinking hasn't worked well. Strength often catches too many folks by surprise and they end up providing strong underlying support rather than adding selling pressure.
What we have to watch for on an open like this is how quickly the underinvested bulls and worried bears jump in on a pullback. While we are likely to see some selling of an open like this, it will often be surprising how fast it finds good underlying support.
Another positive for the bulls is that the technical pattern of the indices is good and supports a breakout move. The iShares Russell 2000 (IWM), PowerShares QQQ (QQQ) and Nasdaq have good-looking cup-and-handle patterns and are setup well for new highs. Even if the opening strength is faded the technical pattern suggests more upside down the road.
The bears, of course, are going to be focused on their list of negatives, and tapering in particularly. Big-picture negatives have been completely ignored by this market but the bears keep hoping that their day will come and all those worries and concerns will deliver steady sellers. The bears have been horrible at timing this market. They are going to try again this morning to call a top, but if they think it is going to be easy, they really haven't been paying attention.
It is going to be an interesting week but, as I discussed last week, stock-picking has been the way to go. If you stay focused on finding good individual stocks you have been doing well in this market. The big-picture bears will continue to whine and complain while stock-picking bulls make money.
Buckle up, it should be a fun week.