After a strong three-day run and a huge gain on Tuesday, a little consolidation would not only be unsurprising but quite healthy. Unfortunately, the selling was spurred on by the terrorist shooting in Canada, and it went a little beyond a healthy pullback.
Small-caps were poor in particular, and gave back almost the entire gain from Tuesday. Breadth was two-to-one negative, and momentum stocks were more than three-to-one in the red.
The momentum over the last few days was powerful enough to allow for some profit-taking, but there is going to be a big change if the dip buyers don't show up fairly quickly. The key to these V-shaped moves is that the underlying support has been extremely strong. If that support is eroded, then the market will take on a different nature.
Today, the biggest problem was the underperformance by small-caps, which have led both up and down recently, and they definitely lagged badly today. If that theme continues, we will have an issue.
There is a flood of earnings reports, which should help with individual stock-picking, but the lack of good setups is making this a very tough market to navigate.
Have a good evening. I'll see you tomorrow.
OCT 22, 2014 | 1:37 PM EDT
There Is Minor Profit-Taking
- Dip buyers are in no rush.
The market has succumbed to minor profit-taking as the news media focuses on a terrorist attack in Canada. It is just enough of a negative to prompt a bit of profit-taking in a market that is a little overbought, following the biggest day of the year.
The big challenge in this market continues to be finding decent entry points. The market has gone from very oversold to very overbought, and that doesn't give us many decent formations. For the contrarians who try to fade excessive moves in either direction, it may be a tradable action but it is not easy.
Breadth is still good on the NYSE, with 1,400 gainers to 1,625 losers, but the Nasdaq is seeing a bit more pressure. Biotechnology, oil and chips lead to the downside.
If the market really is back on track, as many folks now think, then this little pullback shouldn't last for long. Dip buyers should be anxious to take advantage of some weakness, but so far they are in no rush.
I have nothing on my buy screen right now, but I will keep looking. Some flat action is really what we need right now.
OCT 22, 2014 | 10:33 AM EDT
The Bulls Deserve More Respect
- As usual, fear of being underinvested is propping up the market.
The bears tend to forget that upside momentum doesn't die easily. While it may seem logical that the market needs a rest after having had its best trading day of the year, it is easy to overlook the fact that a session like that of Tuesday creates a tremendous outperformance anxiety. Many market players are now far more worried about being underinvested than they are about a downward reversal.
That doesn't mean you should rush in and load up on long positions, but the bulls should be given more respect than many of the bears are affording them. The likelihood of some backing and filling remains high, but the bulls have regained the edge they had lost, and that requires us to maintain a positive bias for now.
The great challenge of this market right now is that the action doesn't create many good setups. "Buying the dip" isn't normally considered a setup, but that is the trading strategy that has worked the best. If you are looking for bases, breakouts, pivots and so on, you will have very little from which to choose. That is especially true when the market blasts higher, as it did Tuesday.
Right now my biggest position is in Alibaba (BABA), which is moving to an all-time high and has a good shot at the psychologically important resistance level of $100. I'll be flipping some, but with that new high, Alibaba will be attracting increased momentum interest.
Meanwhile, Stock of the Week Akorn (AKRX) continues to act like a champ. Apple (AAPL) is starting to act like a safe harbor, as I had expected. Finally, a small-cap technical pick this morning is Pernix Theraputics (PTX), whose chart is showing a double-bottom cup-with-handle pattern. In order to bring in buyers, the stock will need to move through $9.25 or so with some authority.
It is thin pickings as far as setups are concerned, but don't use that as an excuse to be aggressive with shorts.
Oct. 22, 2014 | 7:23 AM EDT
The Bears Really Should've Learned by Now
- This sort of upward momentum does not fade quickly.
Sameness is the mother of disgust, variety the cure. --Petrarch
The market enjoyed its biggest gains of the year on Tuesday, but this action doesn't necessarily make for easy trading. Many market players were caught flat-footed by the straight-up surge, and were woefully underinvested. The folks in the media and the buy-and-hold crowd loved the action, but active traders were grumbling about how they never had a good opportunity to add much long exposure.
This sort of action is nothing new -- we have seen it repeat many times in recent years. It is our old friend, the "V"-shaped bounce, continuing to surprise folks with its power. The market will break down and raise concerns that maybe it's finally undergoing a change, but then the central banks will come to the rescue and cause the averages to fly straight back upward as if nothing has happened.
This time the buying catalyst came from news that the European Central Bank (ECB) would buy not just government bonds, but also corporate bonds. Decent earnings from Apple (AAPL) and a couple of other companies helped, as well, though overall the numbers have not been so great this earnings season.
So now what? The bears were ready to jump back in and try shorting this spike. Their logic, which is understandable, is that the indices have run up too much, too fast. That may well be the case -- but you would think that, after many years of similar action, they might have learned that this sort of momentum doesn't fizzle quickly. The fact that the market is up quite a bit doesn't mean the climb won't persist.
I spoke with some grizzled old traders Tuesday -- and they said this action is illogical, but that at least they have learned not to try shorting it, as they would have done before central banks and computers became the only important factors to the market. They may not like the way that things move, but they have adapted, and that is something that all good traders must do.
The major indices are reading as a bit overbought now, so some backing and filling would make sense. But one thing to keep firmly in mind is that, when markets move like this, they don't just suddenly reverse and decline again. This sort of action creates a big supply of underinvested bulls who will provide underlying support. Many have missed out on the big gains, and are now anxious to try adding long exposure so they don't miss out on more.
Straight-up moves, then, tend to create the conditions for more straight-up moves. There is just too much cash out there that needs a place to go.
The last two years have been particularly difficult for hedge funds and actively managed money. These giant, sharp bounces result in massive underperformance among those who have taken defensive action, and then have been unable to put cash back to work quickly enough during the ensuing climb. This market dynamic constitutes the biggest change in the market since the Great Recession, and it has resulted in joyless rallies and chronic underinvestment by bulls.
Early indications are signaling some rest, but underinvested bulls will be on the hunt for long exposure. Don't be surprised if the market holds up well.