Not even the bulls saw this sort of action coming today. It was an old-fashioned melt-up on hugely positive breadth. The degree of the strength was surprising enough, but coming as virtually everyone was talking about the narrowness and small-cap underperformance it was downright stunning.
There was no obvious news catalyst. We had lackluster action last Friday and Asian markets were weak on the China PMI number. The economic news this morning was ok but nothing really good enough to suggest a better economy or bad enough to make the Fed more dovish.
What most likely caused the upward trajectory was a combination of new money being added as we start a new month and poorly positioned bulls that were becoming increasingly nervous about the action. There have been quite a few long-term bulls growing cautious lately, and they had to scramble today to reposition.
The straight-up action in October produced quite a bit of underperformance and that anxiety increased as we ramped up all day today. The fact that there wasn't any clear news catalyst probably helped to keep things running.
Technically the indices are extended and volume today wasn't particularly impressive. That is the most obvious bearish argument but it hasn't worked very well, especially when bulls are out of position. We have earnings coming up and many people would love to buy dips.
It has never been easier to find reasons why this market should fall apart, which seems to be the main reason that it isn't. Stay open-minded and expect the unexpected.
Have a good evening. I'll see you tomorrow.
Nov. 2, 2015 | 1:36 PM EST
Price Action Is King
- A long list of negatives doesn't matter.
Bulls and bears are acting surprised by today's market action. The bulls have been fighting for a while but the weak close on Friday had made a number of bulls more cautious. We have a slow-motion melt-up on very good breadth. One of the big complaints lately has been weak breadth, but we have a total reversal today with 4,350 gainers to just 1,400 decliners.
The bears keep thinking that mediocre earnings, stretched valuations, international economic weakness and the potential for interest rate lift-off by the Fed are great reasons for the market to correct. Apparently, they haven't learned over the past seven years that a long list of negatives doesn't matter. Price action is king. When the market is acting well, the buyers want in and the bears are road kill.
One of the worst things you can do is to expect the market it to act in accordance with standard logic. If you think that just because you can find good arguments against further upside that it will have to go down, you will soon be broke. The only logic that really matters is that there is apparently still plenty of cash looking for a place to go.
I have quite a bit of idle cash and I keep looking for entry points. I took some Advanced Drainage Systems (WMS) and Sarepta Therapeutics (SRPT), but I could certainly use more.
This market is surprising, but as the old saying goes, "If you can't beat them, join them."
Nov. 2, 2015 | 10:28 AM EST
Bears Are Feeling the Pain
- Fear of being left out and underinvested is driving the action.
Big-cap technology stocks are mixed today and keeping the indices contained, but the underlying the action is pretty good. Breadth is at about two-to-one positive with strength in biotechnology, drugs, chips and banks. Precious metals and retail are the laggards.
Recently leaders such as Facebook (FB), Alphabet (GOOGL), Amazon (AMZN) and LinkedIn (LNKD) are relatively weak, which may actually be a good sign. These stocks need to consolidate a bit and money is rotating into some new names. That is definitely much healthier than the narrow, index-driven action seen lately. What this market needs more than anything is some good new leadership.
I'm having an extremely difficult time finding appealing chart setups. Whether a chart is "good" or "bad" is highly subjective but for my style of trading they have mostly been lackluster. I feel like I've been forcing things a bit if I try to put money to work.
A couple small-caps I'm watching this morning are Energy Focus (EFOI) and Energy Recovery (ERII), although there is a high level of randomness and it is necessary to give things some room.
Overall the markets are chugging away quite well, which is causing some intense pain for bears that believe the market is extended and the news flow negative. However, once again, it is the fear of being left out and underinvested that is driving the action.
Nov. 02, 2015 | 7:07 AM EST
The Great Majority of the Market Has Actually Been Falling
- But the S&P 500 is actually higher since July of last year.
"All truths are easy to understand once they are discovered; the point is to discover them."
Asian stocks are lower on poor economic news in China, European stocks are higher on some factory activity numbers and U.S. stocks are looking ahead to the jobs report due out on Friday. Central bankers still rule the markets and the economic news is only important in that it may push them to act or not act.
The intense focus on the prospects of more quantitative easing is nothing new, but what is different is that the market isn't reacting in the same manner. We still have movement in the indices, but the majority of that is due to money flowing in and out of some big cap names and index ETFs. The great bulk of the market has been in a bear market for a while, and that is still the case even with the S&P500 within shouting distance of its July highs.
If you really want to know the true nature of this market, then you should look at the percentage of stocks that are trading over their 200-day simple moving average. At the close on Friday, it was 32.75%. In other words, over 66% in the market have done nothing for over six months. They have been struggling, and many are in downtrends.
Back in July of 2014, the number of stocks over the 200-day simple moving average was close to 75%. So the number of stocks that are trading over a key moving average level has fallen from 75% to 33% over the last 15 months. That means the great majority of the market has actually been falling. However, the S&P500 is actually higher in the same period. Negative non-confirmation isn't much clearer than that.
We can go on at great length about the truth of the underlying action in this market. It has been poor, and there many hedge funds and individual investors that can confirm that as they have struggled to keep pace with the indices. For many pros, the irony is that they would have been far better off just buying indices rather than trying to pick stocks in an environment where most of them are not working. If you haven't been highly concentrated in a few big caps, you have lagged.
The question this morning is whether or not that is about to change. Is this market going to broaden and are big caps leaders finally going to lead? Are we going to see some good stock picking in smaller stocks as we head into the best time of the year seasonally? That would be nice, but at the moment there is nothing at all to indicate that is the case.
What we have right now are a couple major themes. A narrow market that is driven higher by a small group of big caps, continued focus on central bankers and great uncertainty about when the Fed will act next and a lot of lousy charts. It is not a great trading environment, but that is nothing new.
We are starting a new month and seasonality is positive, but the jobs news on Friday looms large. It was a lousy jobs report last month that ensured that the Fed stayed dovish and produced one of the best months of performance in years. Will another lousy report send us still higher, or will a decent report raise fears of hawkishness? Even the market doesn't seem to know what it wants right now, and that is the issue.
We have a mixed start to the new month, but dip buyers often show up on Monday morning. The hard part will be finding good vehicles for our precious capital.