Editor's Note: The following article was written by Jim Koford, Vice President, Shark Investing.
We started the day with a modest bounce, but traders quickly faded the opening gap. The indices are flopping around the flat line, but we're not too far off yesterday afternoon's lows and it's a mixed bag out there. Consumer discretionary and materials are leading to the upside, while energy is the main laggard.
Under the surface, there is a smattering of names like Star Bulk Carriers (SBLK), Navios Maritime (NM) and Safe Bulkers (SB) in the shippers and VisionChina Media (VISN) and ChinaCache International (CCIH) in my China watchlist that are acting well, but I'm seeing plenty of reversals again. Overall, it's a slog out there, but that's been the case since Monday morning's upside gap.
I'm digging through the charts and am watching for any setups to develop as the day wears on, but the overriding emotion today seems to be hearty disinterest. It looks like Rev picked a great day to take his family to go play in the snow.
Dec. 13, 2013 | 8:48 AM EDT
Pay Attention to the Pitfalls
- ut for now, the broader uptrend remains very much intact.
Heading into December, the market wasn't as extended to the upside as it had been back in May or even toward the end of October, but things were quite overbought. This left conditions ripe for the sort of pullback that we have seen over the past couple of weeks.
The fact, however, is that the S&P 500 and the Nasdaq are not even 2 percentage points off the highs, and the Dow is barely over that mark. One of the most bullish things a market can do is get overbought and stay overbought, but those sorts of conditions don't make it easy to do more than some very short-term trading. We desperately needed some backing-and-filling, and that's exactly what we've seen... so far.
Probably the most challenging aspect of trading lately is that there hasn't been a lot of good movement under the surface. Leaders like Baidu BIDU, Google (GOOG), Yahoo! (YHOO), MasterCard (MA) and Priceline (PCLN) have continued to act very well, and Facebook (FB) and Twitter (TWTR) have put in some solid bars. Overall though, sharp reversals have been abundant and momentum players have been reluctant. You have needed to be a sharpshooter to pick off some good trades lately.
Despite another weak close Thursday, that changed to some degree, as names including Cytrx (CYTR), Pointer Telocation (PNTR), Idera (IDRA), AerCap (AER), Icad (ICAD) and Gentex (GNTX) put in some solid bars and offered various entry points throughout the session. It was encouraging to see movement like that with the market closer to some support levels.
Of course, any time there's some red on the screens -- or heaven forbid, consecutive down days -- the good folks in the media begin asking if this is the beginning of the end. Their guests, in turn, will obligingly come up with any number of reasons that they think that stocks are surely headed lower. The most obvious culprits right now (as I am sure you are well aware, because they're getting wall-to-wall coverage on all the financial networks) are the possibility that the Fed will taper its quantitative easing (QE) program and gains harvesting.
Although it took them a few years to figure it out, everyone now agrees that this bull market has been driven by liquidity. And now everyone seems to know ahead of time the pandemonium that will ensue when Dr. Ben and his Merry Band of Economists begin to ease back on the throttle. Just like they knew that the Fed was going to start to taper back in September.
Given the influence of QE, it's not hard to wonder if they're right, but the simple truth is that no one really knows. If I have learned one thing over the years, it is that absolutely no one is smarter than this market. What I can count on is that the market gods are going to do what they're going to do regardless.
The bottom line is that the broader uptrend is very much intact. All trends eventually end, and this one will, too. Given how far we've come, it's really hard to avoid the temptation to say that the bull has run far enough, but it's hard to be overly bearish with the indices barely off record highs. It's impossible to accurately predict turning points. You've seen people try to do it this year, last year, back in 2008 and in 2007, and on and on, but to no avail, and that's why we never play that game with our capital.
For now, the trade remains to avoid chasing much when the market is overbought and look to deploy capital into pullbacks. That can change at any second, but until there is hard evidence that this approach isn't working, that's what we'll continue to strive to do.
Pay attention to the pitfalls, and be mentally prepared to shift to a more defensive posture. We can draw those lines in the sand, but so far there's been no evidence that the bears are starting to gain a toe-hold.