The market action cooled off for a second straight day, which is exactly what we needed. It isn't much of a pullback, but many stocks are consolidating big gains, which is very healthy after the run we've had.
It is important to recognize that the market is quite likely to be sticky to the upside when we've had very strong momentum. There is very good underlying support from underinvested bulls and it will take time for that to erode, if it does at all.
Markets that make new highs don't reverse and go straight down, which is why it is often said that tops are a process. I'm not predicting a market top, but if you are bearish, it is important to be respectful of the way a top develops. It will take a while, and if you are too anxious to short, you will suffer some pain.
The market is doing exactly what it needs to for further upside. It is pausing after a good gain and working off overbought conditions. It would be helpful if it pulled back even more and stirred up a little nervousness, but that may be too much to ask of a market that has moved like this one.
We have the elections tonight, which may cause a few jiggles tomorrow but, overall, it looks like business as usual for the bulls. Putting money to work remains the key challenge. Don't let difficulty in that regard make you unduly bearish.
Have a good evening. I'll see you tomorrow.
Nov 04, 2014 | 10:20 AM EST
Hunting for Entry Points
- This flat action helps, but we still need consolidation.
We have some typical "late in the game" action as buyers try to find exposure but upside momentum slows. Breadth is running about 2,150 gainers to 2,900 decliners and my momentum screen is about 50/50.
LinkedIn (LNKD), Baidu (BIDU), GoPro (GPRO) and a few other things are attracting momentum interest, and BABA has good support, but it is seeing some "sell the news" pressure after an overnight spike.
The main thing to keep in mind is that markets that have been as strong as this one has lately tend to be sticky to the upside. The strength creates strong support and quite a bit of performance anxiety, and that prevents the sudden collapse that the hopeful bears think will occur.
Alibaba (BABA) is much debated today. As I mentioned earlier, I sold down my remaining position into early strength and I'll be looking to rebuild it as it sets up. It is still a bit technically extended but I believe it will be an institutional darling in the year ahead. It's big, liquid, not expensive and has a good story, including the China cache. It is an easy place for a big fund to put money without taking much speculative risk. I'll be adding shares, but not right now.
The hunt for entry points continues, and it is remains quite difficult. This flat action helps, but we still need consolidation.
Nov 04, 2014 | 8:11 AM EST
Keep Plugging Away
- And respect that momentum.
Perspective is everything when you are experiencing the challenges of life. --Joni Eareckson Tada
There is no shortage of news to drive this market. We have lousy economic growth in Europe, oil prices falling, deflation worries, Japan flooded with liquidity, positive seasonality, more quantitative easing (QE) likely in Europe, U.S. midterm-election results and earnings reports.
It sounds like a recipe for wild volatility, but instead what we have had is tremendous one-sided momentum. It has been all bulls, all the time. The market paused slightly yesterday, but the action has been straight up for more than two-weeks now, and has left a wreckage of underinvested bulls and crushed bears.
As I discussed yesterday, momentum like this doesn't end easily. This sort of action creates a huge demand for stocks and very strong underlying support. The market doesn't just suddenly reverse and go straight down unless there is some exceptional and totally surprising news. There is plenty of news out there, but none of it is surprising enough or negative enough to halt this momentum.
The casual market observer tends to think that this market action is easy. "It is going straight up so all you have to do is throw money at it." That is true to some degree, but for active traders and investors who seek to gain an advantage by timing the market and looking for technical setups to drive their decisions, it is far from simple.
Back in the days before central banks and computerized trading dominated the action we'd actually see some ups and downs as human emotions impacted the way stocks moved. That is seldom the case these days. The only thing that matters is quantitative easing, and how the computers are programmed to take advantage of it.
Our job is to find a way to maneuver, and that isn't easy when things only move in one direction. The slight pause in the uptrend on Monday was a healthy respite, but it isn't enough to correct overbought conditions or to provide any real consolidation. We need more of a pause, but market players are so desperate to play catch-up that is hard for stocks to rest.
Alibaba (BABA) earnings are out. The company's earnings per share was in line with expectations, and revenue was a bit ahead. It is a solid report, but the stock has made a big run into the news, and it will be interesting to see how well it holds. In this market, fear of being left out tends to trump any "sell the news" reaction, but from a technical standpoint this isn't a chart that is easy to chase. I sold half of my remaining position on the news.
Putting money to work remains the biggest challenge of this market. It isn't going to become easier until we actually see a little fear or nervousness. We need some resets, but those won't come easy. Keep on plugging away, and respect the momentum -- but make sure you stay disciplined as well.
