One thing you can say about this market action, it is not very surprising. We had a number of good reasons for profit-taking on Friday and Monday, but these sorts of pullbacks seldom seem to gain any downside momentum. Instead, the dip-buyers inch in and then buyers pile in when it becomes clear how inept the bears are.
This sort of action creates a lot of confident bulls, but it is understandable since it has worked so consistently for so long. The bears will tell us that this will eventually lead to a disaster, but we've heard that argument for so long that it has lost all meaning.
Personally, I prefer more ups and downs. A good hard hit every once in a while creates a new set of opportunities, but market conditions just don't seem to favor that these days. That isn't normal, but this dysfunction is now the new normal.
Small-caps are still well off recent highs but the rest of the market is looking at another test of the highs. Momentum isn't that strong and fewer than 200 stocks hit new 12-month highs, but what you have to focus on is the very strong underlying support. The bulls may not be engaging in a buying frenzy, but they sure aren't willing to sell much either.
Have a good evening. I'll see you tomorrow.
Dec. 02, 2014 | 1:39 PM EST
Lulling Traders Into Staying Bullish
- If you had been lax, you have paid a price.
One of the biggest challenges traders have faced this year is determining how tight to set stops. The market has consistently rebounded very quickly from dips and pullbacks, but if you had been lax in using discipline when we had the four corrections this year, you have paid a hefty price.
The market has done very well in lulling traders into staying bullish. The trends have been so consistently strong that it is quite costly if you don't fully embrace them. This makes folks much more lax with stops, and that can be painful when we finally do get a pullback.
The action today is another great example of how strict discipline after a couple days of poor action can be frustrating. The market is acting like it doesn't have a care in the world, but yesterday, plenty of stocks were bidless.
The perma-bulls tell us we are foolish to think we will even have a minor pullback, and traders reluctantly jump back in, even though many are actively hoping for more downside. The fear of missing out on more upside has been the dominant force in this market for a long time, and that is what is moving the market again today.
We do see some fading in small-caps, but breadth has improved a bit, which is now more than two-to-one positive. There isn't much wild momentum out there other than TASER International (TASR), Digital Ally (DGLY), and a few biotechnology names, but sellers have learned their lesson about betting on failed bounces.
DEC 02, 2014 | 10:47 AM EST
Anxiety Gets the Bulls Running
- And the bears were unable to fade early strength.
After the yesterday's weak action, the dip-buyers have shown up and are producing an early bounce. Breadth is running 3,250 gainers to 1,800 decliners and biotechnology, solar energy and retail are leading. Chips and precious metals are lagging, but oils are holding steady.
One market theme in recent years is how quickly we forget what happened the day before. Take Alibaba (BABA), for example. It broke down technically yesterday and didn't seem to have much support. This morning nothing has changed, but there is a decent bounce and strong support. I suspect that action like that is due largely to the algos shifting the bias to positive from negative, which is why the movement feels forced.
The best thing the bulls have going for them this morning is that the longer the market holds, the more anxiety grows that they may miss out if they don't rush back in. We are already seeing an extension of the bounce because the bears were unable to fade early strength.
I've noted a number of times lately about how performance anxiety was likely to help the bulls into the close of the year. Thomas Lee provided hard data to back that up. He states that when 40% or more of active managers are lagging their benchmarks by 250 basis points or more, the market rallies 9% on average in the fourth quarter. That gives us room to run.
I have small trades in DepoMed (DEPO) and TrueCar (TRUE), but, as is often the case, when you play defense one day, the market punishes you the next.
Dec. 02, 2014 | 7:42 AM EST
Signs of a Stealth Correction
- Some damage has been done and increased vigilance is required.
"I'm not very worried. The lower inflation that we'll get from the lower price of oil is going to be temporary ... (Lower oil prices are) a phenomenon that's making everybody better off." -- Fed Vice Chairman Stanley Fischer
Chaos in the oil market is giving an extended market a good excuse for a little profit taking, but the more important issue is whether it will be a catalyst for more than just a minor dip.
The action on Monday was very similar to how our four prior corrections this year have started. The senior indices held up well, but under the surface there was significant weakness in small-caps and momentum stocks. It has been these stealth corrections that have caused the most pain this year, since they tend to sneak up on market players. By the time they are noticed and fully appreciated, quite a bit of damage has already been done. It doesn't help matters that the media focuses on the DJIA, which doesn't even begin to reflect what is really going on in the market.
The big challenge for market players is how this market has so often shrugged off any and all negatives as they start to show up. Taking aggressive defensive action at the first sign of trouble may seem like a good idea, but in this market you will often find yourself scrambling to add back long exposure when we reverse and go straight back up.
Maintaining long exposure has probably been the most difficult thing about this market in 2014. There are few good entry points and if you play tough defense you will constantly find yourself underinvested and looking for new buys. In the old days, the market would have sufficient bouts of softness to make entries easier. But these days the one-sided action makes it very hard for those who don't always stay fully invested.
It is primarily the central bankers that are responsible for this sort of market action and they were out yesterday telling us that lower oil is a major positive. Obviously it gives a boost to consumers, who are paying less for gas, but the key point made by Fed members was that we shouldn't fear deflation. There is still enough economic growth to push up prices and to keep us on track for an interest rate hike at some point next year.
The bears spin is that the pressure on oil is a symptom of a worldwide economic malaise. Not only is there too much supply, but there is too little demand and it highlights how central bankers action has largely been a failure.
Rather than argue over the macro issue what we need to do is watch the price action. The folks who have tried to call market turns based on big-picture arguments have been wildly wrong for a very long time. The only way to really time the action is to be sensitive to the price action in individual stocks. When it starts to break down technically then we need to jump out of the way quickly.
We had some signs preliminary signs of problems yesterday and the risk that the stealth correction will gain strength has risen. There is a bit of a bounce this morning and we'll see if the dip buyers are ready to go to work, but some damage has been done and increased vigilance is required.