The action today was a good example of the power of momentum. There was a good reason for selling, with the Ebola case in New York. Markets that have been quite frenzied are now overbought. The market started a bit slow this morning, but when the bears were unable to press their advantage, the dip buyers jumped in and the underinvested bulls were on the hunt once again.
The reason that so many traders play momentum is that trends have a great tendency to persist regardless of all the erudite arguments the bears may throw at them. It is quite puzzling that there are so many people who seem to think the market is going to suddenly appreciate their logic and move in the opposite direction.
As Sir Isaac Newton would have said if he had traded stocks: ''a stock in motion tends to stay in motion until it is acted upon by an outside force.'' The only outside force affecting stocks right now is the hope of the bears.
Overall, earnings haven't been too hot, but the market is shrugging it off. Performance anxiety is high, and the action in the market has created a big supply of underinvested bulls that have missed the move and are looking to buy the dips.
While it is possible that this market might roll over quickly and go straight down, such a move would be unusual. Markets that move this strongly don't just fall apart that easily. It may not be easy to buy at this point, but it is very dangerous to fight the momentum.
Have a great weekend, and I'll see you on Monday.
OCT 24, 2014 | 10:52 AM EDT
Choppiness Is a Challenge
- Putting money to work is extremely challenging right now.
The market is trying to shake off worries over the Ebola case in New York City, but a weaker-than-expected new home sales report is keeping buyers contained. The fact that the market is technically extended is also an issue but you can't underestimate the anxiety of underinvested bulls who have been caught flat-footed by the big move this week.
The biggest challenge of this market right now is that the charts are very chaotic. Many stocks that had technical breakdowns two weeks ago have now moved straight back up to new highs. A good example is bluebird bio (BLUE), which shook me out when it cracked $32 but is now hitting $41 a couple weeks later. Nothing at all changed except for market conditions.
Putting money to work is extremely challenging right now. Strong stocks like Alibaba (BABA), Illumina (ILMN) and Akorn (AKRX) aren't allowing entry, while the choppiness makes position trades very hard. I'm still very underinvested and trying not to force trades.
One position I'm building is Lannett (LCI), which preannounced some big numbers yesterday. It is expected to report full numbers on Nov. 3 and that should help to keep it going. I also took some Infinera (INFN) on the dip this morning after it exploded higher on huge volume yesterday.
It looks like the market may rest a bit today, but the dip buyers are going to be lurking. Don't be too negative even though it feels like we are very overbought.
Oct. 24, 2014 | 8:48 AM EDT
Avoid Performance Anxiety
Don't let emotions drive the way you view this market.
Accept the challenges so that you can feel the exhilaration of victory. --General George S. Patton
The market has produced a stunning level of momentum over the past week. Even though it pulled back on Wednesday, it has essentially made another giant V-shaped move that has made life very difficult for underinvested bulls and overly aggressive bears. The market simply doesn't allow any time for a transition from defense to offense.
This behavior is why hedge funds and active managers have grossly underperformed the last two years. As soon as they take defensive action or start to short, the market goes straight back up. Handling market volatility is how active managers have always produced outperformance, but they have a very hard time doing it in this sort of market.
What I find most challenging about this sort of market environment is that the bread-and-butter setups that I have traded over the years don't have time to develop. The style that works best is to either buy into the teeth of a decline and catch a bounce, or chase high momentum and anticipate that strong stocks will continue to go even higher.
A good example of a momentum chase that worked well is my Stock of the Week, Akorn (AKRX), which went from $34 to $45 in five days. Many technicians would have deemed the stock too extended to buy, but they would have missed out on substantial gains if they didn't chase.
Many market players try to deal with this difficult market by focusing on market timing rather than stock picking. They take a top-down approach and focus on trading index vehicles as they try to anticipate the twists and turns in the market. That can work well but it is tremendously difficult to do right now. The big movement in this market is catching everyone -- bulls and bears -- by surprise. You can do extremely well if you guess the right move, but it has basically been a coin flip on many days.
Recently, I have heard quite a few traders comment that they should have focused more on buying index vehicles because individual stock picking has made it so hard to put money to work. Big funds are picking up stocks such as Alibaba (BABA) and Apple (AAPL), but there are few places to park big money other than the index plays.
The key thing right now is to simply be aware of the fact that we have a very difficult market environment despite the headlines in the popular press. Yes, the market has made a huge move but for active traders it has been extremely difficult to navigate. If you are having a hard time keeping pace, you are not alone.
As always, the key to market success is to simply keep at it. Market conditions always shift eventually and this market is going to shift, too. If you let your frustration and anxiety drive your trading, you will make mistakes. It is particularly important to stay disciplined and to be as objective as you can be. Don't let emotions drive the way you view this market. You may feel like you missed out and need to hurry up and buy to keep pace, but don't let that feeling make you less selective with your trades.
One of the easiest things to do in the market is to take on bigger size positions in hopes of making up some ground. Inevitably, that leads to more emotional trading and that causes mistakes. Don't let performance anxiety drive your trading.
We are seeing some pressure this morning, which is mostly being attributed to news of the first diagnosed case of Ebola in New York City. The poor report from Amazon (AMZN) isn't helping either, although Microsoft (MSFT) is a bright spot. Look for choppy action today and for underlying support to kick in.
