The headline writers are going to have a difficult time providing a simply explanation for the market strength today. Some will attribute it to a bounce in oil, but there really hasn't been any major fundamental shift in this market from last week. We still have many of the same issues but we went from bearish to bullish faster than a Bugatti Veyron.
This action isn't driven by news or fundamentals; it is primarily driven by strategic traders and computer algorithms trying to stay one step of one another. They buy dips when things are gloomy and then push us higher to frustrate shorts and underinvested longs. The folks in the media don't like that sort of explanation for what is going on and will focus on other factors like oil and changes in the high-yield bond market.
Part of the reason this sort of trading is occurring is that most of the market is on hold in front of the big FOMC interest rate announcement tomorrow. It is highly anticipated that we will have the first hike since June 2006 and there is much uncertainty about what the reaction might be. Many believe that a rate hike is a longer-term negative, but others think it will be a short-term positive to have it out of the way.
We'll talk much more about the ramifications of the Fed action in the morning, but for now know that the action of the last few days is largely meaningless as we await this news. There is a higher risk of a sell-the-news reaction, but that has seldom been a good bet even on the most anticipated Fed decision.
The trading action that we have had lately requires a very specific approach and it is easy to feel a bit lost if it isn't your cup of tea. After the Fed news is out tomorrow, we should see a shift in what is working again. Just keep an open mind and stay flexible. We'll find ways to make money.
Have a good evening. I'll see you tomorrow.
Dec. 15, 2015 | 1:30 PM EST
Market Bounce Gets Its Second Wind
- Another example of computer programs at work.
The market bounce caught a second wind at midday and we are trading near the highs of the day. Breadth remains extremely strong and, as is so common in this sort of market, there is some chasing as underinvested bulls try to reposition.
This sort of action really is a perfect illustration of how programmed trading exploits emotions to gain an edge. The breakdown on Friday did some clear technical damage and pushed many folks to the sidelines. That was the prudent move. The indices were in a technical downtrend and the odds of downside momentum building were fairly high. If you are a technical trader, there is little choice but to play some defense when this happens.
On Monday, we saw some follow-through to the downside, but the dip-buying programs suddenly went to work. They caught overly bearish market players by surprise and we went out at the highs. Many market players anticipated this sort of turn, but what they didn't anticipate is that we gap up and run today.
The total and complete reverse of very ugly action causes many market players to be poorly positioned. The computer programs keep on pushing things higher, which causes chasing and short covering. The machines keep it going and are able to extract additional profits as the market keeps ramping. There is no easy way to jump in at this point, and the programs exploit that fact by holding things up.
That is the dynamic at work. It has nothing to do with fundamentals. Nothing at all changed the last couple of days. It is just strategic trading by the machines that takes advantage of the normal human logic and emotions.
You can bet the computer programmers are plotting their strategy for how to deal with the FOMC announcement tomorrow. Normal logic would suggest a "sell the news" reaction, so there will be an effort to target those who think it is going to be that simple and easy.
This market is all about short-term directional trades. If that is not your style, you are likely feeling left out and frustrated. After the Fed is done, things will shift again, so be patient if you feel out of tune with the action.
Dec. 15, 2015 | 10:32 AM ET
A Market for Strategy, Not Stock-Picking
- · Movement is random and momentum is not sustained for long.
If you have held onto positions during the recent dip you are feeling pretty good about this market action. But if you played defense and have limited exposure you are likely feeling quite frustrated. There is simply no easy way to put money to work when we have such abrupt swings.
I mentioned this morning that there are markets that favor stock-picking and there are markets that favor strategic moves. The current market favors strategy. The way to make money is to try to anticipate the gyrations caused by computers as they try to take advantage of elevated emotions.
Stock-picking doesn't work in this environment. First, the chart patterns never have time to develop other than in very short-term timeframes. Second, the movement is random and momentum is generally not sustained for long. If your timeframe is longer than a couple days the likelihood is that you will be jerked around.
While the folks in the business media will be celebrating this move, the great bulk of active market players are struggling with it. Even if they do catch it, it is very hard to have a high level of long exposure and who can be confident with the FOMC on deck?
I'm still riding a few of the "FATMAN" names -- Action Alerts PLUS portfolio holding Facebook (FB), Growth Seeker's Amazon (AMZN), Tesla (TSLA), Microsoft (MSFT), Alphabet (GOOGL) and Netflix (NFLX) -- and recent technical pick Duluth Holdings (DLTH) is doing well on initial coverage. Mitek Systems (MITK), a recent favorite, is on my radar for a bounce. I'd love to put more cash to work but it sure isn't easy.
Dec. 15, 2015 | 7:18 AM EST
The Bears May Be Trapped as 'Buy the Dip' Kicks In
- The computers are good at playing emotions in these markets.
"Happiness is nothing more than good health and a bad memory."
-- Albert Schweitzer
One of the primary things that has made the market more difficult in recent years is the abruptness of the swings. Just when it looks like we are going to gain momentum (especially to the downside), we will suddenly turn in the opposite direction for no real reason.
We have a bounce in oil being used as the main justification for the strength this morning, but after the shellacking the market suffered on Friday and the poor breadth on Monday there are many folks out of position for a strong open this morning. In addition, there are many market players content to sit on the sidelines in front of the FOMC interest rate announcement tomorrow afternoon.
The explanation for this sort of behavior is obvious. It is largely computer driven. We saw the computers jump around erratically yesterday morning, but ultimately the "buy the dip" program did kick in. That is followed up by further buying in order to trap those market players that took a defensive posture after the technical breakdown that we suffered on Friday.
These sorts of sharp moves are accentuated be the fact there are so many traders that anticipate them. One of the big differences in the market these days is that there is no real fear. After the action on Friday, the normal response used to be some real panic on Monday morning. We saw a little of that, but the aggressive traders were all lined up to buy any weakness. They were not fearful at all. They were anticipating a trading opportunity, and now are pressing for more as the bears have their foot in a trap.
Following this open, things will quickly become complicated once again, as there is going to be extreme focus on the FOMC announcement tomorrow at 2 pm ET. It is widely anticipated that an interest rate hike will be announced, but is that good news or bad? Some of the recent market gyrations are a function of pricing in that news, and since it is so well indicated there are going to be those that are looking for a "sell the news" reaction.
In the short term, I expect the FOMC to soften the blow of a hike with some very dovish comments that the market will like. When we combine that with the normal end-of-the-year pressures, the conditions for some upside over the next couple weeks are high.
My game plan is to look for more places to put some capital. As I discussed yesterday, my first move was to buy some FATMAN -- Action Alerts PLUS portfolio holding Facebook (FB), Growth Seeker's Amazon.com (AMZN), Tesla (TSLA), Microsoft (MSFT), Alphabet (GOOGL) and Netflix (NFLX) -- names like FB, MSFT and AMZN. Microsoft is my Stock of the Week and offered a nice entry yesterday.
The big problem right now is that charts are a mess. You are not going to find many good position trade setups. If you want in, you have to be looking at bounce plays. The bigger cap names universe is the easiest and safest place to look for them at the moment.
I expect there to be some volatility as the FOMC news approaches and market players try to position. Overall, the technical condition of the indices is still problematic, but the computers are doing a nice job of using that fact to trap traders that are sticking to old market rules.