Everyone knows that the market has a positive bias as the year ends, but the bounce we've had over the past four days is downright euphoric. The major indices were all up around 5% during that period and the worries caused by weakness in crude oil have been completely forgotten.
While we had good gains in the indices again, the underlying action is a bit choppy. There was strength in momentum names such as Facebook (FB), Sierra Wireless (SWIR), Taser (TASR) and Chipotle (CMG), but big-caps Gilead (GILD) and Alibaba (BABA) and the oil-related names traded very poorly.
There were quite a few comments about how it is easier to just buy index plays and forget stock-picking. One used to be able to produce superior returns with good stock-picking, but these days the indices tend to drive the gains much more than individual stocks do.
The bears thought that this market bounce was going to fizzle last Thursday and they have undergone a dramatic squeeze since then. Once again, the smart move has been to stay with the momentum even if things seem extended. The time to turn bearish is when the price action shifts and, so far, there is little evidence that is occurring.
The action is going to become thinner and choppier in front of Christmas, so be prepared for randomness if you plan to trade.
Have a good evening. I'll see you tomorrow.
Dec. 22, 2014 | 1:58 PM EST
Benefit From Holiday Trading
- There's no edge making big-picture predictions.
The market is bouncing back from the slow drift lower this morning. It still has slightly positive breadth, but the action is random as traders hunt for action. Juno Therapeutics (JUNO), Herzfeld Caribbean Basin Fund (CUBA) and Direxion Daily Russia Bear 3X ETF (RUSS) are providing amusement, but the action doesn't reflect a high level of conviction.
In this market environment, the best approach is to look for isolated trades that may benefit from "holiday trading." There is no real edge trying to make big-picture predictions. It is easier just to seek names that traders have on their radar and trade them very quickly.
An interesting news item today is that a hedge fund run by Meredith Whitney may be shutting down. Ms. Whitney made a name for herself in 2008 when she predicted that Citigroup (C) was going to cut its dividend. She made a great call in front of the financial crisis but has since been unable to duplicate that success. She made a particularly poor prediction in 2010 when she forecast that there would be a huge crisis in municipal bonds and was subject to much derision when she attempted to make more dramatic predictions.
There is a high level of schadenfreude on Wall Street when a high-visibility personality is knocked off their perch, but Ms. Whitney is a particularly good example of how "gurus" can live off one big call for a very long time. Many pundits strive to make calls like this because they can use it for many years to create a business. In many, if not most cases, they can't duplicate that success again. Almost everyone who claimed to have predicted the 1987 crash turned into a joke in subsequent years. High-visibility pundits keep trying to be bold and provocative but often end up just looking ridiculous.
The important lesson for market players is that you don't need to make big, dramatic market predictions to do well in the market. It is great for pundits who need attention to create drama, but when it comes to producing exceptional returns, it is counterproductive to make these sorts of predictions constantly. The way to make big money in the market is by slogging away day after day.
A long line of market pundits have gone through the same evolution that Ms. Whitney is experiencing now. It should be a reminder that predicting the future is not the most important aspect of making money in the market.
Dec. 22, 2014 | 10:44 AM EST
That Holiday Feeling
- The upside momentum continues, but it's slowing.
The trading already has a holiday feel as volume starts to drop and random pockets of action develop. Traders are particularly interested in (JUNO) today, which closed poorly after being one of the most highly anticipated biotechnology IPOs of the year. Taser (TASR), Direxion Daily Russia Bear 3X ETF (RUSS), Sierra Wireless (SWIR) and Palo Alto Networks (PANW) are also attracting interest.
Breadth is running 3,200 gainers to 2,250 decliners and retail is leading while oil and biotechnology lag. Biotechnology has been the go-to sector for momentum trading, but it is getting hit on some bad news from Gilead (GILD). Bluebird Bio (BLUE) and Kite Pharma (KITE) are a bit extended, but I'm still playing the sector with TG Therapeutics (TGTX) and Amicus Therapeutics (FOLD).
One important thing to keep in mind is that while we have favorable seasonality, there are other agendas at work this time of the year, such as tax-planning and booking gains into cash. While we have a tendency toward mark-ups, there usually are bouts of profit-taking at the end of the year.
The upside momentum continues, but it is slowing and there is a fair amount of chop. Make sure you are prepared for random movement.
Dec. 22, 2014 | 7:30 AM EST
We Have Tricky Conditions
- There's seasonality, but also outside factors that can be random.
Don't have regrets in life, only lessons learned. --Heather Romiti
It is rather fitting that we are concluding 2014 with one of the most vicious V-shaped bounces in a market that has been full of V-shaped bounces.
There, fast and furious recoveries have become the hallmark of this market. In 2014 we have had five such bounces, with the one last week being the quickest.
These bounces make the buy-and-hold perma-bulls fat and happy, but they create a great amount of frustration for the many market players who try to time the markets ups and downs. The bears are obviously destroyed when the market turns so quickly just as it looks like it is on the verge of finally going into the long-awaited correction that everyone believes is inevitable.
Ironically, it is the bulls who are the most frustrated when the market recovers so quickly. They are constantly caught by surprise and are greatly frustrated in their ability to keep pace with the market. One common comment last week was that it probably would have been better to just buy an enhanced index EFT rather than try to pick individual stocks.
The difficulty in navigating this market is exhibited well by the fact that active fund managers are having one of their worse years of underperformance in a while. Managers have not done well in recent years, but this year has been particularly difficult because of the consistent V-shaped bounces.
The way most active managers beat the markets isn't by outperforming in uptrends. The big advantage they typically have is that they outperform during pullbacks and breakdowns. By limiting losses in a bear market, they produce outperformance with just average returns in an uptrend.
This market has made that style of trading exceedingly difficult. When a fund manager does finally catch a pullback or downtrend, the V-shaped bounce is so quick that he or she never has a chance to reload. Most managers just don't think it is possible for the market to keep coming back in this manner. The action last week was particularly surprising to the market player that keeps thinking that market conditions are changing.
With just 6-1/2 trading days left in the year and many market players ready to close up shop for the holidays, we have tricky conditions. The good news is that we have positive seasonality, strong momentum and performance anxiety to keep driving us to the upside. The bad news is that there are plenty of outside factors, such as tax planning and positioning, which can make the action quite random.
On Friday, we saw some major computer-driven buy programs kick in that kept the market running, just as many market players were thinking we were overbought and ready for some rest. That is what happens when emotions are running hot and the computers go to work.
All the year the lesson of the market has been to stay with the upside momentum as long as you can. It has been a major mistake to anticipate pullbacks and weakness. You have to wait for the price action to actually shift before you can become more bearish. Right now, the bulls still have the ball and are running with it.
We have another mild gap up open on the way. Volume will slow dramatically as the week progresses, but that may favor the bulls as the computer programs keep on pushing.