Market action is seldom as crazy as what we saw this week. On Monday and Tuesday we crashed lower as oil went into a freefall and helped to devastate the Russian economy and its currency. On Wednesday, the market bounced back when Federal Reserve Chair Janet Yellen swapped the phrase "considerable time" for the work "patient."
On Thursday we exploded higher again as the bulls anticipated that a V-shaped bounce was occurring and desperately tried to stay in front of the move. Ironically, this huge move helped to create even more performance anxiety for poor fund managers who can't keep pace with this market. They had no choice but to keep chasing the market, which resulted in even more gains to conclude the week.
There are only 6 ½ trading days left in 2014 and we are seeing classic Santa Claus action right now. Money managers are still hoping to put some performance points on the board, and even if they underperform, are still going to push.
Quite often we have some odd action in the last few days of the year as positioning and tax planning take place, but right now the bulls are looking for some holiday trading to go along with their egg nog. While we are looking rather frothy that doesn't matter much to charging bulls.
Enjoy the holiday parties this weekend. I'll see you on Monday.
Dec. 19, 2014 | 10:42 AM EST
A Needed Day of Rest
A flat to down day provides better setups going into the holidays.
The market is a bit tired after the emotional rally over the last couple of days, but support is excellent support and breadth is still running positive, particularly on the NYSE. Oil bounces are helping and biotechnology continues to attract speculative interest. The momentum list is running about even.
These are often good days for stock-picking as traders focus on a narrower group of stocks, which helps some of the best trades to stand out. I'm not seeing many good pockets of action, but traders are focusing on bounces in oil MLPs. On the upside, there have not been a lot of big themes lately. The best by far has been biotechnology, and that continues to be where the hot money is hunting for action.
A day of rest is what we need at this point. We can easily afford to give some back, and I don't think that is going to scare out too many folks and provoke a bout of profit-taking. A flat to down day is what we need for better setups going into the holidays. So far, the foundation for a good finish to 2014 is developing.
I'm dinking around with smaller trades today in Agenus (AGEN), MiMedx Group (MDXG) and Infinera (INFN). I'm looking to be a bit more aggressive into the close. For now, we are just digesting the recent action, and that is a positive.
Dec. 19, 2014 | 7:39 AM EST
The Self-Fulfilling V-Shaped Bounce
- The bounces snowball as players try to stay ahead of them.
A Scout is never taken by surprise; he knows exactly what to do when anything unexpected happens. -- Robert Baden-Powell, founder of the Boy Scouts
It isn't too surprising that we have seen another V-shaped move in this market after the oil-driven breakdown. What is surprising is that the bounce was so vicious and that oil didn't come back much at all.
Market players are so used to these V-shaped recoveries that they are making them bigger and faster as they try to stay in front of them. The more you try to anticipate the bounce, the earlier and the more aggressive you buy. That is what has happened over the last couple days as market players were quite confident that the market would produce another quick, straight-up bounce. The fact that we are in the best time of the year seasonally helped to add fuel to the fire.
So, now what? Can the indices build on a move of more than 4.5% in two days? Yes, they can. This is the seventh time the S&P 500 has had back-to-back 2% moves when it was over the 200-day simple moving average. The index was higher five days later six out of seven times, with an average gain of 2.36%, according to paststat.com.
The bad news about this statistic is that the last time we had this happen was in April 2000, which marked the top of the Nasdaq bubble. The bears will be focused on that fact, but for those who traded back then this market feels nothing at all like it did at that time. The mood now isn't nearly as euphoric. In fact, the moves elicited a high level of disgust once again as many market players were left on the sidelines and couldn't keep up.
A good example of how this market action has caught people by surprise comes from Investors' Business Daily, which is the bible of momentum players. Its market timing indicator went to "market in correction" a few days ago and still has it there after the huge move. The timing system used by IBD requires technical follow-through days and this action simply bypasses that requirement. The theory is that markets that break down don't go straight back up, but that has not been the case in this market for a long time. If you didn't buy the breakdown, you had a hard time getting back in.
There really is no question that this market action has left a huge number of people behind. One common comment yesterday was that it was a complete waste of time trying to pick individual stocks because the only way to keep up was to buy leveraged index ETFs. Many market players are convinced that the market is now driven much more by indices than by the underlying stocks. A few years ago that wasn't possible. But now the focus on index vehicles makes it the prime moving force in the market.
I've been writing for a while that the extreme performance anxiety coupled with positive seasonality is likely to drive this market into the end of the year. The action of the last couple days is confirmation of just that. We are a bit frothy now and could use a rest, but the need for relative performance has only increased due to this move. Underlying support should be extremely strong.
We have a slightly positive bias to start the day and it's option expiration day, which will help to keep it choppy.