The market is now at the point where the jokes about how it will never downtick again are half serious. We saw some slight weakness this morning but momentum stocks, particularly biotechnology names, reversed and picked up some serious steam.
Big-cap names such as Alibaba (BABA) and Microsoft (MSFT) are attracting institutional money that is desperate for a place to go. Most big funds prefer to average down and improve their cost-basis but they don't have that choice in this market.
Breadth wasn't hugely positive and the point gains weren't that big. However, momentum names were better than 80% in the green and there really weren't any pockets of weakness to be found. It was just another day of hunting for entry points in a market that moves in only one direction.
I noted last night that there were some slight signs of problems but the market simply laughed at that observation and proceed to run up once again. By just about any measure, the market is extended, but that isn't a concept which matters any more.
We will get jobs news in the morning, which will likely be the excuse for more buying. But I'm sure there will be some forlorn bears who still believe that it is possible to "sell the news."
Have a good evening. I'll see you tomorrow.
Nov. 6, 2014 | 13:04 PM EST
Don't Underestimate Underlying Support
- An extended market is becoming even more extended.
One of the easiest things to do in this market is over-anticipate a pullback. Although it may seem reasonable for the market to take a rest after a straight-up run on a steady supply of positive news, you simply can't underestimate the level of underlying support. There are legions of folks hoping for pullbacks, not because they are bearish, but because they are so anxious to buy.
So often our rallies seem to be unappreciated, if not downright hated. The reason for that is because there are so many bulls that are trying to find ways to produce relative results. The best way to do that is to sell strength and rebuy on dips. This market simply does not accommodate that form of trading, however. If you start flipping and locking in gains you have a very hard time jumping back in.
The main reason for the continued strength today is in anticipation of bond buying by the European Central Bank. Everyone knows it is eventually coming and that is all we need to make an extended market even more extended.
I'm in the grossly underinvested category right now. I'm holding Zeltiq Aesthetics (ZLTQ), Alibaba (BABA) and Vasco Data Security (VDSI), which are acting well but aren't in a position where I would add to my positions. There is absolutely nothing wrong with the action other than there is so little consolidation.
I mentioned this morning some minor signs of weakness under the surface. That seems to have abated for the moment, but I'm watching breadth in momentum stocks very closely as well as the relative strength in small-caps. Those are my early warnings systems. At the moment they look OK.
Nov. 06, 2014 | 10:33 AM EST
Cracks Are Showing
- The major indices are hiding what's going on in certain groups.
Promises that massive quantitative easing by the European Central Bank is forthcoming helped to put some bids under the market to start the day, but traders appear to be nervous about the potential for profit-taking. There were subtle signs of selling under the surface yesterday, and we need watch closely to see if that picks up today.
A key sector to watch is biotechnology. The group has led the rampage the last few weeks, but it has also been the leader in each of the pullbacks this year. The stocks that have cracked first when the market starts to consolidate are biotechnology, big-cap momentum names and small-caps. The major indices hide what is going on in those groups initially, so it is important not to take the action in the DJIA or S&P 500 for granted.
A number of stocks I've discussed, such as Vasco Data Security International (VDSI), Zeltiq Aesthetics (ZLTQ), Tarena International (TEDU) and RadNet (RDNT), continue to act well, but I'm putting almost no new cash to work lately. I nibbled a little Pozen (POZN), which had a solid report and good numbers, but my trust level in further momentum is extremely low.
I've mentioned several times this week how strong markets tend to be sticky to the upside. That is still taking place, but a few flaws are appearing and that needs to be monitored closely.
Nov. 06, 2014 | 6:54 AM EST
This Market Simply Doesn't Rest
- And this is the great challenge for players.
"Deep down below the surface of the average conscience a still, small voice says to us, something is out of tune".
A steady supply of positive news has helped to propel the market's V-shaped bounce to new highs. This morning we have the next potential catalyst, as the European Central Bank is set to announce its latest economic policy. The big issue is whether or not it will commence buying sovereign bonds as has been widely anticipated.
The market is expecting that news to come soon, but probably not today. If it is announced, will likely see a very sharp spike as market players anticipate what happened when Japan announced its massive boost to the QE program last week.
The great challenge for market players is that this market simply does not rest. We've had a couple minor pause days in the Nasdaq, but it hardly warrants the description of "consolidation." We are hovering at highs and there just isn't much slowing in the momentum.
We did have weakness in a number of momentum stocks on Wednesday, which caught the attention of some traders, but it was fairly mild in view of the recent strength. Over the past year all of our market corrections have started with some weakness in momentum stocks and small caps. Typically the big cap defensive stocks will hold up the senior indices, while the selling starts to develop under the surface. If you aren't cautious, the breakdowns under the surface can extract a pretty good toll before there are even any signs of problems in the major indices.
Four times previously this year we have had "stealth" corrections of this type. In each case the damage to small caps and momentum stocks has been much greater and has occurred much quicker than what we saw in the DJIA or the S&P500.
While I'm not predicting this is about to occur again, it is important to keep this pattern of action in mind. Another common occurrence has been that semiconductors have been strong right before we had a turn down. We had a surge in a number of chip stocks yesterday and many long time traders find that to be a bit worrisome.
The ECB is going to set the tone today but the important thing will be to watch the action in key momentum names. Tesla (TSLA) is helping the bullish cause with a gap up following its earnings but it that doesn't hold we'll need to watch to see if selling starts to spread. We've had quite a bit of weakness in travel related stocks like Priceline (PCLN) and TripAdvisor (TRIP). Keep an eye out for more negative themes as an indication that trouble may be brewing.
I never like to be overly anticipatory, but it has paid this year to react quickly when momentum and small-cap stocks start to crack. They have burned many traders who stuck with them, because the major indices still looked quite good. Right now there is no question that the indices still have momentum, but it is the underlying action that is going to be our best guide as to how to proceed.
We'll see what the ECB has up its sleeve and then go from there.