Stocks had a bid all day and it was probably due to anticipation of the European Central Bank's interest rate announcement in the morning. The U.S. market flew higher when the possibility of European QE was announced a few months ago, but now the big question is when will it start and how much bond buying will be done.
One thing market participants have learned very well is that you don't fight the central bankers, and that is why we have had such strong underlying support. Much of the momentum looks tired and many traders are downright miserable because they can't seem to gain an edge on the action, but they know better than to play the foolish top-calling game.
A little drama on the ECB news would be a nice shift after weeks of this slow grind higher, but the market seems to enjoy confounding market players who pray for volatility. You can bet the dip-buyers will be ready to pounce if we have a negative reaction, but there is the chance that something new will develop.
Stay vigilant and don't underestimate the power of central bankers and performance anxiety.
Have a good evening. I'll see you tomorrow.
Dec. 03, 2014 | 2:17 PM EST
A Peculiar Rotation
- Small-caps are outperforming stodgy big-caps.
The indices continue to hold up extremely well and breadth is 2-to-1 positive, but the most notable thing about the action today is that there is a peculiar rotation taking place. Small-caps are outperforming and stodgy big-caps like Berkshire Hathaway (BRK.B), 3M (MMM) and Honeywell (HON) making new highs. What is odd is that there are very few momentum names being gunned up, although the market continues to hold like a rock.
We are at the stage where many folks are concerned that the market needs to rest but they are afraid to sell and miss further upside. The anxiety over underperformance is extremely high and that pushes money managers to stick with their long positions out of fear that they will lag even more if they try to time a market top. Of course, seasonality helps the bullish cause as well.
The best trading action is coming from bounces in oil plays like Memorial Production Partners (MEMP) and New Source Energy Partners (NSLP). There are very few standard momentum breakouts, and you have really have to dig if you don't want to buy charts that are too extended. I own positions in Tower Semiconductor (TSEM) and Fiat (FCAU), but it is not easy to add further shares as they stretch into new high territory.
It is tempting to try to be clever and proclaim that we are about to top out, but there really isn't reason to believe that the trend is suddenly going to shift. It definitely feels like we need a change in this monotonous action, but it has been like that for weeks.
Dec. 03, 2014 | 10:25 AM EST
Momentum Is Waning
- But there is still strong support and dip-buying interest.
There is plenty of green on the screens and the indices are probing new all-time highs again, but the momentum isn't quite as strong as it was in October and early November. It has been waning for a while, but there is still strong support and dip-buying interest.
Breadth isn't bad but the number of stocks making new highs is contracting and there just aren't many big movers. My list of momentum stocks is around even right now, but the losing stocks are down more than the winning stocks are up.
The action gives the feeling that market players don't have much choice but to keep pushing if they want to produce relative performance. There has been absolutely no opportunity to short other than a few select names, like my stock of the week, a short of Tesla (TSLA).
My long inventory was substantially reduced this past Friday and Monday and I simply don't see much that I want to add back. I'm kicking myself for a rather poorly timed stop on some Alibaba (BABA) shares but most of my other sales are not looking bad.
I flipped some Digital Ally (DGLY) this morning and have not seen anything new I want to buy so far. The action isn't bad but it feels like the upside progress is becoming more difficult. I'm inclined to try Direxion Daily Small Cap Bear 3X ETF (TZA) if we take out the opening levels, but the underlying support in this market is far too strong to be aggressive to the downside.
Dec. 03, 2014 | 8:22 AM EST
Monitor the S&P 500
- If the 2050 level falls, this market's character will quickly change.
Adventure may hurt you but monotony will kill you. --Unknown
It is becoming rather monotonous, but for quite a while the market has tended to quickly bounce back from two days of selling pressure. The pullback wasn't all that deep but there was some damage done under the surface. A number of momentum and small-cap names broke support. Nonetheless, the dip-buyers did their thing again and the bears, who were hoping for some downside momentum, were forced to cover and wait to retry once again.
There is no question that momentum has been slowly lately. The pace of the advance over the last couple weeks has been positive but is progressing at snail-like speed. That is helpful in working off overbought conditions but the slow momentum is causing some worry that a topping process is starting to play out. There really hasn't been enough negative action to start talking about a top but the battle lines are being draw.
Right now, key support is at the 2050 level of the S&P 500, which was the Monday low, while overhead resistance is at 2075 -- which was last week's high. Traders will be looking for a break of either level to signal the direction in which momentum is moving. Clearly, underlying support is strong. However, upside progress is becoming difficult, so traders are more anticipatory than usual as they wait for greater clarity.
Many bulls are counting on positive seasonality to keep this market running but be aware that the last two weeks of the month have the strongest positive inclination. The first two weeks of December are much more challenging in general.
Trying to time a top in this market has been impossible since the October lows. The fact that it just keeps on trending upward has rendered all efforts at trying to time a turn as not only useless but money losing. What has worked best in this market has been to simply stick with individual stocks that are working. If you have ignored all the big-picture arguments and simply respected momentum, you have done much better than all the clever folks who keep trying to predict the impact of international events.
Stock picking is becoming increasingly difficult because more and more stocks are slowing as they make highs. The number of stocks making 12-month highs yesterday on the NYSE and the Nasdaq combined was only 187, which is not what you would have in a market with strong momentum. When the market is really flying, we will see 600 or more new highs.
It is very quiet out there this morning and traders' moods are mixed. They are looking for direction to emerge so they can decide which way they are going to trade this market. Bounces like we saw yesterday don't tend to fail in this market, but if it stalls out again, there is going to be more profit-taking pressure.
Keep a close watch on the 2050 level of the S&P 500. If that falls, the character of this market is going to start to change very quickly.
