It wasn't much of a pullback, but the market needed some rest, after the wild momentum of the last couple of weeks. The market is still extended and could use more consolidation, but at least things have cooled off, and some sanity has returned to the action.
As far as profit taking goes, the action has barely earned the name, but breadth was negative and the pockets of momentum contracted quite a bit. GoPro (GPRO), Arista Networks (ANET), Alibaba (BABA), and LinkedIn (LNKD) were attracting attention, but investors were much more selective today.
Ideally, the market will continue to consolidate, and then set up for a year-end run. However, one of the big shifts in this market, in recent years, is that we seldom see flat action for very long. It is either straight up or straight down, and if you wait for setups to develop, you never have much of an opportunity to buy.
Markets this strong tend to have very good underlying support on the first few pullbacks. It is the opportunity the dip buyers have been waiting for, and they won't hesitate for long.
The election will happen tomorrow, which will occupy the media, but the BABA earnings report is probably more important in establishing a theme. The bulls still have big-time momentum, and the pause today is very healthy.
Have a good evening. I'll see you tomorrow.
NOV 03, 2014 | 12:47 PM EST
The Election Question
- Will Tuesday's elections affect the stock market?
No one who has heard of the Federal Reserve seriously believes that President Obama or either of the political parties has affected the stock market very much in recent years, but this is a market looking for an excuse to sell off. As I've pointed out repeatedly, it is very extended and upside progress is slowing, but there is still too much momentum for any real downside.
Whether the Republicans can take control of the Senate is going to be a very entertaining question on Tuesday, but the market isn't likely to care very much. Regardless of what happens, we will have gridlock for another two years.
Even if the results are largely irrelevant to the market it may still be an excuse for a little volatility. Although the results won't be known until very late Tuesday night, look for some election-related action to start tomorrow.
One group in particular that will be interesting is oil-related names. A Republican victory will be regarded as oil-friendly, but oil has been under severe pressure due to concerns about growing supplies, so it may actually be a negative for some fracking-related oil producers. On other hand, suppliers of fracking supplies, such as sand, may benefit.
While tomorrow's election will garner a tremendous amount of press coverage, its effect on the market will primarily be due to timing, technicals and a potential "sell the news" reaction, rather than anything substantive. If we do see selling, it will have little to do with whether one party or the other is better for the market.
Nov. 03, 2014 | 10:26 AM EST
Market Frustration Mounts
- Concepts such as 'overbought' have become meaningless.
If you are holding positions, this market continues to act quite well. But if you are trying to initiate new trades, it is extremely challenging. By just about any measure, the market is extended, which makes new buys very difficult, but there's sufficient upside momentum to make shorting impossible.
One thing you have to appreciate about algorithmic trading is that concepts such as "overbought" are meaningless. In fact, many programs attempt to push extended stocks even higher since there is so little resistance, and it is so easy to squeeze the bears who think they can call tops.
I'm frustrated with the market, as I find it nearly impossible to buy anything new. Very few stocks meet my parameters. That doesn't mean that there aren't stocks going up, but I see no way to enter them right now. A good example is (LCI), which I've be talking about for a couple of weeks. I'm still holding shares, but I see no way to buy more. Earnings are due after the close tonight, and the stock has run up about 30% in nine days. It has momentum, but it has priced in a lot of positive news.
There are plenty of other stocks, like Lannett (LCI), which the bulls are celebrating, but from a trading standpoint, I see nothing to do with stocks like that. We need consolidation. One of the big complaints I hear about the market is how it goes straight up or down and there is nothing in between.
I congratulate traders who are finding good opportunities. You have to press, if that is the case. If it isn't a market that you can work with, you need to back off and be patient. That is what I'm doing.
Nov. 03, 2014 | 6:38 AM EST
This Momentum Won't Be Easily Thwarted
- Remember Newton's laws of physics.
Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it. --Isaac Newton's First Law of Motion
During the month of October, market momentum worked in both directions. The indices fell hard as worries took hold regarding a slow economy and the end of the Federal Reserve's quantitative-easing program. Yet the averages bounced back even more quickly than that as market players were caught underinvested and the Bank of Japan revved up its printing press.
The market has grown used to "V"-shaped bounces over the last few years, but the current one has been one of the most powerful we've seen. The market went from a breakdown to new 12-month highs in near-record time, and it has been a wild chase to try catching a ride.
The good news for the bulls is that momentum this powerful doesn't come to an end easily. As Isaac Newton has noted, once an object is in motion it tends to stay in motion until some outside factor comes into play.
In the stock market, a big, fast move -- such that of the past week -- creates conditions that provide fuel for further upside. First and foremost, it produces a raft of underinvested investors and traders who never had the chance to put cash to work in the manner that they would have liked to do. The discipline of many market players is to avoid chasing strength. They prefer to buy pullbacks and basing action. Many fund managers work hard to improve the cost-basis in their favorite holdings, rather than to leverage up into strength.
The fast and furious action of the last few weeks, therefore, has caused tremendous performance anxiety -- and that has triggered even more upside pressure. There is simply no way funds can keep pace with a market that moves in this manner. The only way to outperform is to be fully invested and to stay that way.
One of the most perverse things about this sort of action the large attendant supply of bears trying to fight it. These folks have great reasons to believe the action is unjustified, and that it that can't possibly last -- but in their zeal to call a market turn, they merely feed more upside moves as they are forced to repeatedly cover short positions and persist in trying to time the turn.
The bulls, on the other hand, are fat and sassy right now, though this is not an easy market to navigate. If you are long and strong, you have been in good shape, but if you are trying to put new cash to work, it is very challenging to do. You won't find charts that aren't already technically extended. Many traders don't care and are happy to chase momentum endlessly, but if you don't like to buy stocks at new highs and those that have experienced straight-up moves, you have a real dilemma right now.
Even the most fervent bulls will admit that some consolidation is important at this point, and the bears are hoping for some sort of sudden reversal. Still, the dip buyers are champing at the bit and are unlikely to let stocks come in very much -- and those bears are relying on hope and are fighting Newton's laws of physics. A market that is moving this quickly don't just suddenly fall apart unless there is some sort of surprise outside event -- and this market has not even cared about some of the worst earnings reports we've seen in ages.
At the same time, the poor economy outside the U.S. has pushed central banks to take market-friendly action. Stateside economic news, of course, has been better of late.
That aside, the U.S. has midterm elections this week, which some pundits say will have an impact on stocks. Republican control of the Senate is well-anticipated and, if anything, that is likely to be perceived as a positive development for a market that appears to have grown weary of President Obama.
Again, returning to equities, we have little choice but to respect this powerful momentum. While it is difficult to keep on buying, it is even more important that you don't let frustration drive you to be a hopeful bear.
We saw some very mild profit-taking overnight, but underlying technical support is likely to be very strong in the coming session.