Today, many traders joked that everything must be fine, because the Dow Jones Industrial Average barely moved. It's not a very funny joke. If you had done a little digging, you would have found a number of red flags. The most notable problem was the underperformance by small-caps and momentum names.
As I've discussed before, every correction in the market this year had started with positive action in the DJIA, while small-caps and momentum stocks have shown significant relative weakness. We aren't seeing major meltdowns, but there are flaws in the action.
It is interesting to note that the current market leaders are mainly defensive stocks such as Walmart (WMT) and Target (TGT). We have only seen about 150 new highs today, and that is a clear indication of waning momentum.
Whenever there are concerns about the market, the bulls simply point at the indices and shrug. They have been correct in being sanguine, as the bears keep looking for negatives. Nevertheless, the prior corrections this year have come on quickly, so it is prudent to be at least a little defensive, when small-caps and momentum stocks show signs of problems.
The market has not suffered enough technical damage to cause a rush for the exits, but stocks are stumbling around, and the seeds for a more severe roll-over have been planted. The market has often made any sort of caution appear quite foolish, but sometimes that is inevitable. We do our best to protect our capital.
Have a good evening. I'll see you tomorrow.
NOV 19, 2014 | 2:19 PM EST
Fed Minutes Offer No Surprises
- Is an extended market set up for a sell-the-news reaction?
The action was looking a bit nervous this morning, but the dip buyers stepped up about 90 minutes into the day and ramped the market up into the FOMC minutes. The markets blasted higher the last time minutes were reported, but that followed a nasty selloff as the market had grown worried about greater hawkishness.
This time there was no real worries about the Fed, and there isn't much reaction initially. The main headline is that not all members were anxious to remove the "considerable time" language from the policy statement, which isn't a big surprise and supports the argument that Janet Yellen will continue to be quite dovish.
We are seeing some buyers inch in now as the news is digested. There doesn't seem to be anything to support the idea that the Fed will remain accommodative for some time to come. As I wrote earlier the market loves to love the Fed, and that is what they are doing now.
The biggest challenge for market players is staying with the trend when even the most bullish bulls are saying we need a rest. As we saw this morning, there are too many buyers looking for entries to allow the market to stay down for long.
The Fed minutes are unsurprising and the market is extended, which is the sort of setup for a sell-the-news reaction -- but that hasn't happened on Fed news in a very long time.
Nov. 19, 2014 | 10:38 AM EST
- And I have little interest in buying right now.
Although the market action on Tuesday looked pretty good, the indices closed a bit weakly and failed to generate strong momentum. As I mentioned, the number of new 12-month highs was quite low, and overall volume wasn't anything special.
This morning, market players didn't see the follow-through they were looking for, so they started hitting the "sell" button -- especially on momentum names such as Tesla (TSLA) and Alibaba (BABA). It isn't aggressive selling, but there is an inclination to lighten up just in case the downside momentum picks up a bit.
Keep in mind that the minutes of the last Federal Reserve meeting are due for release at 2 p.m. EST. Last month the market blasted higher on that prior round of minutes, which stemmed fears about an overly hawkish Fed. It is unlikely that we will have the same sort of surprise once again, but this market loves to love the Fed, and it will look for reasons to put a bullish spin on the news.
I've cut back a number of positions on the weakness this morning, and I will do some further selling later in the day if we don't see some bounce. The price action is weaker, and I'm doing my best to react to it quickly before it does much damage.
I am doing some minor trading of Amicus Therapeutics (FOLD) and Mind CTI (MNDO), but I don't have much interest in buying right now.
Nov. 19, 2014 | 7:23 AM EST
All Flow and No Ebb
- Even some bulls are hoping for a pullback.
A horse never runs so fast as when he has other horses to catch up and outpace.
The chase to the upside continues, but one of the major differences between the way the market acts now and the way that it acted prior to the Great Recession is that there is so little celebration as we trend higher and constantly make new highs. The buy-and-holders and indexers are quite pleased, but we never seem to have the sort of excitement that we used to see before the era of quantitative easing begun. Market players constantly have to chase and they never can catch up, which leaves them frustrated and unhappy.
The irony of this lack of joy is that it helps to create the conditions that cause it to continue. We are never at the point where there is so much bullishness that idle funds have been used up. Market timers used to be able to apply a contrarian approach at times, and would time tops when everyone was too positive. We never ever arrive at this point these days.
What has changed is that we seem to have an endless supply of underinvested bulls. They are never able to put enough money to work. Part of that is due to the large amount of cheap capital that has been created by central bankers. However, the way the market moves these days, with straight-up V-shaped bounces, never gives them the opportunity to deploy capital the way they would like.
The action yesterday was a good example of how the indices hit new highs but market players continue to struggle to put cash to work. Many believe that we are overbought and have some technical flaws that suggest a pullback is coming, but the pain of being left on the sidelines is just too great. There is a tremendous amount of performance anxiety out there. Actively managed funds have been underperforming for the last couple years and the action off the October low made it worse.
The great wish of many traders these days is that the market have some sharp dips that allow them to buy their favorite stocks at lower prices. The ebb and flow in price action is what gives active traders an edge. But all we have is flow to the upside and no ebb to the downside.
After the strong move yesterday there are even more calls for a market pullback. Of course, there are some bulls who believe the trend isn't going to end soon, but the bears are joined by many bulls who would love to see some downside action so they can trade the market more aggressively.
The important thing is that we can't allow the dour mood to impact the way we view this market. We need to stay focused on price action and not let the attitude of those who keep hoping for some pullbacks impact us. The nature of the market movement may not seem logical, but it is very clear that the trend isn't going to come to an end easily.
There are plenty of negatives out there if you want to make an argument for a market top, but it's a waste of time until there is price action to support the pessimism. Don't forgot that markets at their highs don't just suddenly collapse. Tops are processes that take some time, and at the moment we haven't even taken the first step toward topping.