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TheStreet Open House

Buy the Dips, Sell the Rips

NEW YORK (TheStreet) -- The stock market on Tuesday continued its followthrough from Monday's 180-point move upwards in the Dow Jones Industrial Average and 18-point rise in the S&P 500 index. After last week's wicked loss in all the indexes in excess of 2%, Monday and Tuesday's trading this week has nearly wiped out all the losses.

The last two days had a gap up open that was maintained for most of the trading day. It appears the stock market reached its oversold level last week and reset itself for the move higher this week. Just when the markets seemed to be leaning bearish, traders and investors bought the dip.

Last Friday, the DJIA closed the week at 16,065 and the S&P closed at 1,841. In two trading days this week, the DJIA closed at 16,336 and the S&P closed at 1,872 and change. The S&P is not far from a new all-time high.

The only issue that is of concern is the volume. Monday, the over all volume was 20% lower vs the trend average. Today was not any better. On green days, the volume is substantially lower compared to the volume on down days. This can be an issue as we continue into this trading year.

Wednesday should prove to be a volatile session in the markets as well. We have the FOMC decision at 2:00 p.m. EDT. This always provides for some fireworks. Has the market been front-running this decision?

What is very interesting is that there are 123,007 net long option contracts in gold against the one-year average of 60,736. As far as oil is concerned, there are 432,840 net long oil contracts against the one-year average of 349,652.

So, what this all means is that gold and oil are a leading indicator of inflationary pressures. In 2014, so far, the types of sectors that are leading this market higher are the utilities, along with gold, oil and real estate investment trusts.

These are not the sectors that we want to see leading this market higher. These are classic growth slowing with inflation accelerating indexes The momentum stocks that led this market higher last year are faltering and this is very disconcerting in the long run.

One example of a large cap stock with a market cap in excess of $4 billion that is lagging is Netflix (NFLX). This was a darling of the momentum crowd last year. I am currently long the stock, having bought it Tuesday at the close of the market.

Thus, as this market continues its climb higher, there are many red flags that need to be on the radar screen. The markets are still in a bullish trend, but that can change at any time.

Patience and opportunistic trading are the mantra for 2014. There are too many crosscurrents in this market and from a trading and investing standpoint, one needs to be focused. Having a risk management process that works is very important in today's marketplace.

At the time of publication the author had a position in NFLX.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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