Over the last few years, it has often been said that a market rally is hated. We would see a big move but there would be little celebration among market participants -- apart from the media who believe that up is always good.
The action today is a good example of why so many of these moves have been joyless. There is no question that the action was extremely strong, but when the market goes up too fast, many folks are simply unable to jump back in.
The buy-and-hold crowd will blame that on the futility of market timing but that isn't the issue at all. The issue is that the manner in which those bounces occur has changed dramatically over the last five years.
In this particular case, the S&P 500 has gone up more than 100 points without pause in five days. A 100-point bounce after a breakdown isn't highly unusual but the fact that it occurred in almost a straight line is illogical. That type of movement simply doesn't reflect the way that human emotions tend to operate. The average person doesn't go from doom and gloom to euphoria instantaneously, but that is the way stocks are now moving.
The main consequence of this odd action is that the bulls never have an opportunity to take advantage of the dip so they are chronically underinvested. The bears are simply crushed because they keep thinking the market has to take a rest.
There is no doubt that this action is created by computerized trading. Although most traders understand that, it creates the impression of manipulation and that makes traders even more frustrated and unhappy.
So while it was a great rally, you aren't going to find much celebration. Ironically, that help creates the dynamic for even more upside.
Have a good evening. I'll see you tomorrow.
Oct. 21, 2014 | 13:29 PM EDT
Blame the Algorithms
- This market action is cold comfort for active traders.
The market action today is a good example of the cause of frustration for many traders in the last few years. The market goes from straight down to straight up, with barely a hiccup. It is likely due to the way algorithmic traders operate. They keep pushing a trend once it starts. It isn't natural human reaction, which is part of the reason that it works.
What is so irksome for many traders is that their caution, which was well justified, suddenly appears to be foolish. The market simply never gives much of a chance to reload, as a new uptrend develops. Rather than make a low and slowly improve, we go from doom to gloom, to up almost 4% in three days. Big bounces tend to occur in the context of downtrends, but this sort of move is more than a bounce, as it actually leads to a trend shift.
Those who are holding a lot of positions today probably where holding them when the market corrected. This is cold comfort for active traders, who are used to gaining an advantage when the market undergoes a correction. This sort of market action doesn't allow for traders to have an edge against the buy-and-hold crowd.
I'll be looking for some buys into the close. Alibaba (BABA) is one that I'll be evaluating, but entries are very tough now, and you have to keep on digging until you find the right stuff.
OCT 21, 2014 | 11:00 AM EDT
Stay Focused on Long Entries
- The bulls have regained the momentum, so forget the timing game.
The V-shaped bounce continues. Many market players are feeling frustrated about being underinvested and starting to chase. The chasing action coupled with short squeezes is what creates the V-shaped movement.
The market has gone from straight down to straight up, which is a relief for the bulls, but this sort of action makes it hard to find good entry points. You either have to buy into the teeth of a decline or be willing to bet that low volume, oversold bounces will gain momentum.
Many issued are now overbought, but the frustration of being underinvested keeps a bid under them. This is the type of action that helps to create a big supply of dip buyers who don't like to chase but want to buy on weakness. When there isn't much weakness they inch in anyway and that keeps the V-ish move going.
I'm one of those underinvested traders myself. You simply can't throw discipline to the wind when you are trying to put money to work. I've been playing a few breakout-type moves in stocks such as Akorn (AKRX), my Stock of the Week, and Kite Pharma (KITE), which I had as a Shark Technical Buy last night, but it isn't easy to be aggressive.
Apple (AAPL) is a bit disappointing as momentum is tepid, but it should be a safe harbor into the end of the year. AAPL has morphed into being a defensive stock rather than a growth name, but it will continue to be a favorite of many.
Now that the bulls have regained the momentum you have to forget the timing game and stay focused on finding long entries. It isn't easy but the price action gives you little choice.
Oct. 21, 2014 | 7:42 AM EDT
The 'V' Is Back
- After the recent rout, we're seeing another straight-up move.
Life itself is simple. It's just not easy. --Steve Maraboli
The "V"-shaped bounce is on. The market did an excellent job of following through on Monday after shrugging off a nasty IBM (IBM) earnings report. Breadth was very strong, and the major indices closed near the highs. This morning the averages are set to gap up following a good Apple (AAPL) report and slightly better-than-expected growth in China.
The S&P 500 is still technically broken, but the power of the "V" is building. Those straight-up recoveries are a result of underinvested bulls growing fearful that the market will run away to the upside without them. The short sellers add fuel to the move, but it is primarily driven by folks who have grown used to the market that quickly shrugs off its worries and concerns and reverses back upward. We've seen dozens of moves such as these since the Great Recession, and they are now self-fulfilling prophecies to a great degree.
Technically, "V"-shaped moves don't make much sense. Generally markets don't tend to go straight back up because trapped bulls, flippers and aggressive shorts will sell into strength. That pressure should prevent the market moving so easily to the upside -- but it simply hasn't worked that way.
It is likely that the "V"-shaped moves are aided greatly by computerized trading, as those programs find it easier to simply run over any skeptics or doubters. They make money by jumping on a trend, and then pushing it in one direction as far and as quickly as possible. At some point they jump out and lock in gains, but the tremendous buying power of the algorithmic traders does help to create these moves.
For individual traders, the big dilemma in this sort of action is that it doesn't produce good chart-based setups. When stocks go straight back upward after breaking down, few bases or support levels are created and the obvious entry points never materialize -- and all of this actually helps make the "V"-shaped bounce even more powerful.
I don't want to sound overly sanguine about this market. The risk of another down leg is still quite high. At this juncture, the big "V"-shaped move is still just an oversold bounce in a technically broken market. The S&P 500 is set to regain its 200-day simple moving average, based on the futures at this writing, but it has a long way to go to recoup the 50-day. Other indices are in similar position: For instance, the Dow Jones Industrial Average is now lagging due to the pressure created by IBM, which is one of the largest components of that outdated and irrelevant index.
At this point, most prudent traders who took defensive action during the breakdown are probably underinvested. Some are going to start chasing this open, and others will inch in as long as this market stays in positive territory. The hard part will be finding good charts -- but many will just jump into whatever stocks have good relative strength and will hope to catch momentum.
These "V"-shaped moves are celebrated by the buy-and-hold perma-bulls, but they are not easy to trade for those who are trying to navigate the market's ups and downs. Stay vigilant and manage positions closely, and you will find new opportunities.