"Sell the news" action sounded like a logical idea after the run we've had in anticipation of a deal in Washington, but the problem is that this market doesn't care about the big picture. Market players are anxiously chasing performance and any weakness is an opportunity to make up relative performance.
I don't want to sound like an out-of-control bull but the price action in this market is too positive to dismiss. While it is easy to make up arguments for why we will have to weaken eventually, it has been costly to anticipate a market top.
All year the bears who try to call tops have been crushed, but they are doing it again and already they are well under water. I understand the inclination to try to guess when the market will roll over but when you repeatedly lose your shirt, you might want to consider another approach.
The bears were also hopeful that weak earnings from the likes of IBM (IBM), Goldman Sachs (GS) and eBay (EBAY) would help to put pressure on the market, but there was little sympathy action and now Google (GOOG) has put up an extremely strong report.
The market seems a bit frothy, especially after the mess in Washington, but the key is to stay focused on price action. When the character of the action shifts, we can react quickly and be far ahead of those sitting on the sidelines wishing and hoping that the market cools off.
Have a good evening. I'll see you tomorrow.
Oct. 17, 2013 | 12:53 PM EDT
Bears Digging a Big Hole
- They underestimate the dynamics of the buying interest.
Over the last few days I've been discussing why I don't expect much of a sell-the-news reaction to the debt deal in Washington. I did expect that we might be down for a couple hours, but even that proved to be too pessimistic. The bears even had some help from poor earnings reports, but market players remain focused on finding more long exposure. This morning's dip was immediately bought
What is most notable about the action is that the appetite for speculative trades is not slowing down. Big-cap momentum is being chased, but even more impressive is that the small-cap indices are hitting new all-time highs. Money is not flowing into the safety of bigger-caps. It is chasing small, more volatile stocks in hopes of better returns.
The bears keep underestimating the dynamics that are driving this buying interest. They focus on the obvious negatives and overlook the fact that buyers are trying to generate better returns and the way to do that is to keep on chasing this market. Price action trumps fundamental negatives.
Many times this year I have written how we need to ignore the fundamental arguments and stay focused on the price action. Today is another good example of exactly that.
The bears will eventually have their day, but they are digging a big hole for themselves while they wait for it to happen.
Oct. 17, 2013 | 10:32 AM EDT
A Knee-Jerk Reaction
- Until the price action weakens, ignore the bears.
We are seeing a knee-jerk "sell the news" reaction but it looks worse than it really is because IBM (IBM) and Goldman Sachs (GS) are weighing on the DJIA. Don't forget that the DJIA is price-weighted, therefore higher-priced stocks like IBM and GS have many times the impact of a GE (GE), Intel (INTC) or Cisco (CSCO). It makes the DJIA a useless indicator, in my opinion, but the media has used it for so long that no one even thinks about it.
Under the surface we are seeing dip-buying again. Breadth is positive and the other indices are working hard to go green. Momentum names like SolarCity (SCTY), Facebook (FB), JinkoSolar (JKS) and Netflix (NFLX) continue to attract interest. I see minor profit-taking in places but nothing to indicate a rush into cash.
I've been a net seller this morning as I reduce positions into strength but I continue to hunt for new buys. One name I'll be stalking for additional entry points is NQ Mobile (NQ). I don't like the chart much now but it is shaping up and has interesting fundamental news. Solars obviously remain very hot and I'm looking to add to JKS and China Sunergy (CSUN) as they develop.
Don't be too quick to give up on this market. The bears are going to be rolling out more negative arguments but until the price action weakens, ignore them.
Oct. 17, 2013 | 8:04 AM EDT
Time to Sell the News?
- It may be too obvious to work.
"Once you hear the details of victory, it is hard to distinguish it from a defeat."
-- Jean-Paul Sartre
Everyone complained about the political situation over the past couple weeks. But would the market have been this strong if we hadn't had the debt crisis?
The irony of the recent action is that it attracted more buyers than sellers, because market players wanted to be long when the inevitable deal was made. Although the media were full of doom and gloom and sensationalistic predictions about the chaos of a debt default, the market never really had any doubts that a deal would be made.
Throughout the crisis, we really had only one day of real selling on Oct. 8. Under the surface, there was extremely strong action in big-cap momentum names and small-cap junk, particularly China-related. Market players were far more worried about being left out of the action than they were worried about being caught in a politically created meltdown.
Now that the deal is done do we suffer the sell-on-the-news reaction that so many bears are predicting? The setup for it is nearly perfect after a big run into well-anticipated news, but it may be too obvious to work.
The psychology of sell-the-news is quite simple. Buyers jump in as they anticipate positive news. When it actually occurs, they figure there isn't much upside left, so they lock in the gains, which sends the market back down. It used to be pretty common in the old days -- that is, before the crash of 2008-2009 -- but the market seldom reflects human emotions in the same way these days.
A good example of how sell-the-news failed to work occurred last January following the fiscal cliff crisis. A deal was made as we kicked off the New Year, and rather than sell off as some bears predicted, we went straight up for months.
There are a number of reasons why sell-the-news doesn't work that well these days. Part of it is computer-driven trading, which tends to move the market counter to standard technical analysis. We have seen this quite often in the form of V-shaped moves that make the market more and more extended and overbought.
The main reason that we don't see standard sell-the-news reactions is because we always seem to have extremely strong underlying support. There are always buyers hoping and praying they can buy a dip. Dips don't cause fear that builds and leads to breakdowns. Dips invite buyers who have been rewarded consistently when they jump in on pullbacks.
The bears will argue that there are other reasons to believe that the market is going to struggle. First and foremost, the economy is still a mess. This debt crisis will cut fourth-quarter growth, and many are predicting that the holiday shopping season will be quite poor. In addition, it looks like earnings may be a bit problematic after some soft reports from IBM (IBM) and eBay (EBAY) last night.
The bull's response is that this whole crisis simply guarantees that the Fed will continue to provide low interest rates and endless liquidity. We may have some negatives out there, but everyone knows the most important rule of all is to not fight the Fed.
I don't want to come across as a raging bull; some sort of consolidation is needed after the recent frenzy. I hope we do have a pullback. We need it to give us some new setups. I see no reason to make grandiose bearish predictions at this juncture, however, as the bulls have done a remarkable job lately. We'll wait and see if they lose their momentum. Right now, they are in control of this market, and the bears are only hoping that they will lose their energy.