After the Fed-induced fireworks Wednesday, the market calmed down today. Unfortunately, it calmed down so much that it was practically asleep. It traded in a very tight range all day with a slightly negative bias. That isn't a bad way to consolidate recent gains but it does require patience.
Despite the slow action in the indices, there were pockets of momentum. Apple (AAPL) Tesla (TSLA) led the big-cap names while shippers, solar energy and China had small-cap action. There were still more than 500 new highs so there was a good amount of strength to be found.
The indices are still a bit extended and the market is starting to focus in the budget battle in Washington again, so there are possible negative catalysts ahead. We'll be hearing plenty about what can go wrong but there is one big thing to keep in mind, which is that this market has created a huge supply of folks who are underperforming and anxious to buy dips and pullbacks. There is heavy-duty support out there and it isn't going to be easy for the bears to gain downside traction.
The market could use a bit more rest, but don't confuse that with topping action. The trend is still to the upside.
Have a good evening. I'll see you tomorrow.
Sept. 19, 2013 | 1:15 AM EDT
Whose Market Is It Anyway?
- Stock-pickers are outperforming the market-timers.
Breadth is negative and slipping, and the indices are close to flat, but there's good speculative action under the surface. We had similar conditions in August as the indices corrected by stocks like Tesla (TSLA), Facebook (FB) and Netflix (NFLX) attracted the hot money and continued to trend higher.
That sort of action is the definition of a "stock-picker's market" and it certainly is an improvement over the highly correlated action we have seen at times when issues like European sovereign debt have dominated. We also have seen highly correlated action when the algorithms have been in control.
What we are seeing now is traders trying to produce relative performance by selectively buying a limited number of stocks. It is unusual that the leading stocks don't have more influence on the indices but, clearly, there are strong pockets of momentum trading without regard for the indices.
Momentum stocks can shift quickly so we can't be too complacent, but there is impressive price action in individual names that really stands out when the overall market looks dull and in danger of rolling over.
The challenge is that the small group of stocks performing well are becoming so extended and overbought that new entries are a problem. If you want to put cash to work, you have to keep looking for new ideas and hope you can catch some of the crazy momentum still occurring in a number of places.
Stock-picking is outperforming market-timing. Keep that in mind as you consider how to deal with this market.
Sept. 19, 2013 | 10:30 AM EDT
The Focus Shifts
- If you want to make money, pick stocks with good charts.
Traders are working hard to build on yesterday's momentum, but the action is mixed. Breadth is almost exactly even on the Nasdaq while the NYSE is doing better.
A few big-cap names are being chased, like Apple (AAPL), Tesla (TSLA) and Facebook (FB), and the hot money is active in smaller names like FAB Universal (FU), Kandi Technologies (KNDI), Himax (HIMX), Eagle Bulk Shipping (EGLE), Century Casinos (CNTY) and Kongzhong (KONG).
It is refreshing to see that the focus has shifted back to stock-picking now that we have digested the Fed news. If we stick with the right stocks, we should be fine even if the overall market pauses to work off overbought conditions.
What has worked best in this market is to focus on stocks with the best relative strength and not get caught up in big picture, macroeconomic debates. If you manage positions closely, you should be able to find profits.
The easiest thing to do is try to call a market top. I'm sure the glory-seeking market-timers will be getting louder very soon. It may make for good entertainment but if you want to make money, stick with picking stocks with good charts.
Sept. 19, 2013 | 7:57 AM EDT
The Element of Surprise
- Like a good general, Bernanke mystified and misled everyone.
Always mystify, mislead and surprise the enemy if possible. --Stonewall Jackson
Like a good general, Ben Bernanke mystified, misled and surprised many people yesterday. The Fed has been hinting enough about how the economy has slowly been improving to convince most people that some sort of minor tapering of bond buying would be announced. The tapering wouldn't have been enough to have any real impact but, psychologically, it would be a shift and would signal that the economy is starting to turn and that further improvement would soon be forthcoming.
What was most surprising about the Fed move yesterday was the admission that there are still substantial doubts about how quickly the economy is improving. Anyone in the real world knows how slow it still is, but there was evidence that we were at least going in the right direction, albeit slowly.
It almost seems that the Fed purposely misled us about its intentions, which is rather ironic given Ben Bernanke's mandate to provide better communication about what the Fed is doing. The Fed had us prepared for minor tapering and then pulled the rug out from under us. Perhaps they find that sort of surprise more effective implementing policy and that is why they did it, but the market loved it regardless.
So now what? We are back in the position we have been in for a number of years with a struggling economy but a very accommodative Fed. One thing we know for sure is that you can't stop this market if it has the support of the Fed. A lousy economy is more than outweighed by an endless flood of cheap cash.
Technically, the Fed produced a high-volume breakout of the indices to a new high yesterday. Momentum like that doesn't typically dry up quickly. A surprise move like creates a big supply of underinvested bulls looking for entry points on a dip. This market is likely to have very strong underlying support and I don't expect to see any major downside in the near term.
One of the big reasons there is so much angst over this surprisingly dovish Fed is that market players are not well positioned for further upside. We already were overbought and many were hoping that a tapering announcement would give us a pullback and buying opportunities. Of course, the market has consistently confounded underinvested bulls all year long and we are right back at it.
Keep in mind that markets making new highs don't suddenly fall apart. There is too much support, and too many people who aren't in position. There will be plenty of predictions that we are about to top, but that is more hope than anything else.
Stick with the trend and keep digging for new buys. Above all, keep in mind the most important rule of all: Don't fight the Fed.