To end the week the indices continued to hold up extremely well, but there was some choppy action under the surface. It was a feast-or-famine type day, with some strong moves in names such as Alibaba (BABA), Monster Beverage (MNST) and Medivation (MDVN) and plenty of downside action in others, including Salix Pharmaceuticals (SLXP), Arista Networks (ANET) and Illumina (ILMN). Many stocks saw some big intraday swings and the complaints about randomness were louder than normal.
Last Friday, many were thinking this market could not manage any more upside without some rest. They were wrong. We did see the pace of the gains slow a little, but there was no real selling to speak of. Then market still has not consolidated to any great degree, although it isn't quite as technically extended.
It may sound trite at this point, but all you really need to remember is: "The trend is your friend." This has never been truer than recently. The only way to deal with this market is to stick with the price action and keep looking for reasons to stay long. Market players who react too quickly to minor weakness soon find themselves on the sidelines scrambling for entry points.
As has been the case for a long time the mood is not very upbeat. There are plenty of bulls in the sentiment polls, but they are buying because they believe they have no choice -- not because they are excited and optimistic about the market.
There isn't much news flow on the agenda next week, but I don't know if that matters much since news has had such little influence of late. This market is all about putting cash to work. Nothing else matters.
Have a great weekend. I'll see you on Monday.
Nov. 07, 2014 | 10:50 AM EST
We Need a Pullback
- And it needs to last longer than a day.
We're seeing some mild profit-taking in the market in the early going. Biotechnology is leading to the downside, which isn't too surprising, as it has been the hottest group recently. Chipmakers and solar-energy names are also weak, while former laggards oil, gold and steel are leading.
The challenge recently has been that, if you've been too quick to react to minor weakness, you've found yourself sitting on the sidelines when the market has immediately bounced back. The pullbacks have been so shallow lately that you've had to wonder if you should even try to time them.
Of course, that is what eventually leads to much more severe pain when a pullback starts to develop some momentum. The folks who are so sick of being shaken out on minor dips decide to hold through the next one -- which turns out to be the one that develops further.
At this point there simply won't be many good charts for position trades until this market corrects for longer than a day. There are still plenty of active traders chasing momentum and looking to play even minor dips, but if your time frame is longer than a session or so, this is not a very inviting market.
I've made a few sales this morning and am finally seeing some pullbacks in stocks I want to add such as RadNet (RDNT), Pernix Therapeutics (PTX) and Zeltiq Aesthetics (ZLTQ). They all need to do more work, but at least they aren't going parabolic again.
Ideally this market will pull back and consolidate. That, in turn, would set up stocks for a good run to wrap up the year.
That sounds like a plan -- but the market seldom makes it that simple.
Nov. 7, 2014 | 7:34 AM EST
A Scramble for Outperformance
- The market is at all-time highs, but trading this is not easy.
Human behavior flows from three main sources: desire, emotion, and knowledge. --Plato
The market is always driven by psychology and emotions, but there are times when those factors become far more important than knowledge and desire. Now is one of those times.
While the news flow is helping to propel the major indices higher, emotion is the true driver right now. Folks are scrambling to stay ahead of the market, and they can't do this effectively because the action is so lopsided and momentum so strong.
While the bulls aren't having much trouble making money, the big challenge lies in profiting quickly enough to outperform the averages. The majority of fund managers are lagging their benchmarks once again -- and, despite the public chest thumping among bulls, many individual investors are frustrated with their collective inability to stay long and strong.
The challenge of this market is that, in order to succeed in it, you have to stay very heavily invested at all times. You cannot give in to the inclination to take a profit, even in stocks that have become quite extended.
Alibaba (BABA) is a good example of this problem. The stock made a straight-up run into earnings. The company's earnings were good, but not great -- which would suggest it might be prudent to take some profits, and then to look for new entries as the stock consolidates. That would be good strategy, except for the fact that the stock never rested. It went negative for a short time after Alibaba's report, but it has since run up more than 10% off post-earnings lows.
There simply is no easy way for most people to aggressively trade action like that -- and the irony is that the dysfunctional moves create pressure for the stock to continue acting in that manner. The more quickly Alibaba runs up, and the higher it goes, the bigger the supply of folks who want to buy it on a dip. The more people who want to buy it on a dip, the less likely the stock is to dip very much.
The entire market is generally experiencing the same sort of action seen in Alibaba. What's driving it isn't the news about elections, jobs and quantitative easing by central banks. It is all about trying to find an edge in a market that refuses to make trade entries easy.
It is important to understand that much of this action is driven by computerized trading that is designed to exploit the human emotions that are in play. The programmers know that jamming the market higher will cause the action to feed on itself, and will keep the momentum running. They can count on the fact that they will create huge underlying support, as well as a supply of chasers, if they simple keep the computers in buy mode.
So what do you do? You understand and embrace the dynamics at work. You don't try to foolishly fight it based on some bearish big-picture arguments. You keep on looking for ways to hitch a ride on the momentum train until it stops.
Staying with this momentum to the best of your abilities, though, doesn't relieve you of the obligation to be vigilant. We have to watch for a shift in the underlying action to signal that things may be cooling. Watch biotechnology and big-cap momentum names in particular, as they are likely to be the canaries in the coal mine that will signal developing issues.
Yes, the market is at all-time highs, but that doesn't make things simple or easy. Keep on plugging away.