I've been pointing out recently how the indices have been covering up some underlying weakness, but the tables were turned today and the indices understated the strength.
The leading momentum names have been struggling for about a weak now, so it is probably premature to proclaim them healthy after just one good day. But it did help to change the feel of the action. There are the stocks that lead the market and when they act better, they tend to drag along quite a few other names.
Technically, nothing much changed. The major indices are still hovering just under recent lows and the bulls are feeling fat and happy with the strong underlying support. The bears have had some success lately with momentum names and small-caps, but they really haven't been able to crack the indices.
There is often an inclination to make a call about market direction when we have action like this, but the prudent approach is to stay flexible and wait for further evidence. I've been leaning a bit bearish lately, but action like we had today nudges me a bit more to the positive side. We still have issues out there, but the bears still don't have any real juice.
Have a good evening. I'll see you tomorrow.
Nov. 4, 2013 | 1:34 PM EDT
- I want to see how the action holds up as the day winds down.
The indices continue to do little, but breadth is solid with 3,350 gainers to 2,000 decliners and some decent bounces in high momentum favorites like Tesla (TSLA), Netflix (NFLX) and SolarCity (SCTY). There still aren't many momentum names participating but, overall, the momentum names look better, which is helping the tone of the action.
This year, typically, it has paid off to become bullish as soon as we have some positive action, but the market has felt different this past week and I want more proof before I give up on my recent skepticism. I'm concerned that this is just a normal resting day within a topping process.
I have a high level of cash and may consider some buys into the close, but I want to see how well the action holds up as the day winds down. Strength in SCTY, TDSLA, Zeltiq (ZLTQ) and Vipshop (VIPS) is impressive, but I'm not convinced that the momentum traders are going to stick around and keep chasing.
This market may continue to hold up but I'm starting to think that maybe the Twitter IPO later this week will be the topping catalyst that the bears have been waiting for. I'm not betting on it yet, but I'm worried about it even though the price action is better now.
Nov. 04, 2013 | 10:20 AM EST
- If key stocks don't act better soon, support will dry up.
The indices are green and breadth is positive but we continue to see poor action in many leading stocks. Netflix (NFLX), Amazon (AMZN), LinkedIn (LNKD), Google (GOOG) and Facebook (FB) shares are down and struggling to find underlying support. Steel, gold and retail are helping to hold the indices in the green, and solar energy is again attracting hot momentum money.
I find it worrisome when leadership stocks act so poorly. The only group that is seeing any heat is solar. SolarCity (SCTY), First Solar (FSLR), JinkoSolar (JKS) and Canadian Solar (CSIQ) are leading. SCTY is my stock of the week but it reports earnings Wednesday night, which makes things a bit tricky.
My game plan continues to be a defensive posture while trying to pick off a few trades like SCTY. We still have support and dip-buying interest, but if key stocks don't start to act better soon, that is likely to dry up.
Nov. 04, 2013 | 8:25 AM EST
Warning Signs Are Developing
- Be aware of price action in leading momentum, speculative names.
It's easy to look back and see it, and it's easy to give the advice. But the sad fact is, most people don't look beneath the surface until it's too late.
-- Wendelin Van Draanen
Is the market undergoing a topping process? That is the question we face this week. The major indices are holding near their highs but action under the surface has been deteriorating for about a week now. The key leadership and momentum names have been struggling and the small caps had their worst relative performance in quite some time last week.
The bulls simply point at the DJIA and the S&P500 and ask why they should worry. They have a good point, especially as the Fed has backstopped them for years now. But there are some signs that maybe the power of quantitative easing is losing some of its luster. The market is now more worried about tapering than it is celebratory over the continuation of the cheap money policy. While the Fed may not cut back its bond buying soon, it isn't going to increase it, either. And that is what has saved the market so often in the last few years.
The bulls have a couple other positive things going for them as well. Seasonality is positive into the end of the year. We also have a large herd of underperforming fund managers who are anxious for some relative performance into the end of the year. They haven't had much chance to play the market ups and downs as there have been so few downs. As a result, they tend to prevent downside from building. It has been a bad year for hedge funds and many are going to be looking to ride some high beta names into the end of the year.
The bears have their long list of fundamental negatives as well as contrarian arguments like a high level of complacency. We have heard that stuff all year and it has been meaningless. The way to navigate this market has been to ignore the pundits and stay focused on the price action. That's exactly why I'm a bit concerned right now.
Markets need good leadership. and this one has been losing it recently. While stocks like Clorox (CLX) and Procter & Gamble (PG) help to hold up the indices they are not the sort of names that lead a strong market for long. They are defensive names, and it is where big funds, that need to stay invested, will park cash when the growth names are struggling.
With stocks like Tesla (TSLA), Facebook (FB) and LinkedIn (LNKD) struggling to hold key support, it is a sign of a changing market. In addition we had some very hot speculation driving China-related names, biotechnology and a slew of other small-caps. That has dried up over the past week, and it is being reflected in the iShares Russell 2000 ETF (IWM), which did poorly at the end of last week.
Earnings season is winding down but what will be most interesting this week will be the Twitter IPO. This is obviously the most hyped IPO since Facebook and you have to wonder if maybe it will mark some sort of top as the media goes overboard with coverage.
I'm concerned about this market. There are a number of warning signs developing, most notably the price action in leading momentum and speculative names. The market may find its footing like it has done over and over so far this year, but there is good reason for caution right now.