Warning Signs in the Air

This article originally appeared on RealMoney.com on Sept. 3, 2014 at 4:43 p.m. To read more content like this AND see inside Jim Cramer's multi-million dollar portfolio for FREE... Click Here NOW.

The DJIA and S&P 500 didn't do much today but the action under the surface was problematic. The Nasdaq and Russell 2000 lagged, and a number of momentum stocks, most notably Apple  (AAPL) , took hits. It wasn't an across-the-board bloodbath, but there was enough weakness to cause concern.

It doesn't seem reasonable that we finally experience a little selling after a straight-up move over the last month or so. We've barely seen a pullback and the market is unquestionably extended on light volume. Predicting a pullback seems like an easy call, especially with seasonality turning negative.

The dilemma is that this market has treated caution quite harshly. Those who take profits and looks for downside have been consistently whipsawed. Even when there is poor action, it tends to reverse quickly and makes prudent profit-taking seem foolish.

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Markets that have been acting like this one don't go down easily. They tend to stay sticky to the upside, but twice this year we have had "stealth" corrections where small-caps and momentum names were punished while the senior indices barely blinked. Some of the action today was reminiscent of that, and that pushed me to hit the sell button in quite a few cases.

We'll see how things develop, but there were a few warning signs in the air today. A high level of caution looks like the way to go.

Have a good evening. I'll see you tomorrow.

Sept. 03, 2014 ' 1:57 PM EDT

The Secret to Trend-Trading

  • It's all in the reaction.

The secret to trend-trading is not to anticipate what the market might do but to react quickly when conditions change. The theory is that you will make more money if you wait for actual weakness rather than continually anticipate a top. In view of the way this market has traded, it definitely is true that riding momentum and staying reactive has outperformed anticipation of a market turn.

Today we are seeing a shift in price action. It isn't anything major but things were a bit frothy at the open and we've had steady selling before a midday bounce finally kicked in. As far as the indices go, there isn't much of a point loss so far but the action in individual stocks has been problematic. Apple (AAPL) in particular is a sore spot today, but quite a few of the hot momentum names are also seeing reversals.

The action this morning was weak enough to cause me to ramp up my selling. I simply want to keep my accounts as close to their all-time highs as possible and don't want to give back recent gains. I may need to rebuy some things quickly if the market finds its footing, but I like the safety of booking profits and raising cash.

Trading in this manner is what used to give active traders their big edge. It was playing the ups and downs that would help to produce great relative performance. Unfortunately for traders, selling slight weakness has tended to be a mistake in the QE era. Pullbacks are commonly so shallow that if you sell, you end up chasing in order to reload when the momentum picks up again.

I'm not making a market call, but locking in some gains today feels comfortable. It always helps to reset and be more selective when I put money back to work. The trend is still upward, but that doesn't mean a little defense isn't warranted.

Sept. 03, 2014 ' 11:00 AM EDT

I'm a Net Seller This Morning

  • Players worry we may be due for some profit-taking.


The gap up open this morning is producing some sloppy selling, as market players worry that we may finally be due for some profit-taking. Apple (AAPL) is setting the tone with its worse selling since mid-July and other momentum names like Tesla (TSLA) , Twitter  (TWTR)  and Digital Ally  (DGLY)  are seeing profit taking. Mobileye  (MBLY)  is the momentum leader at the moment but earnings are due in the morning and the risk there is quite high.

Breadth is still positive but there is some skittishness. Keep in mind that after the initial inflows on the first day of the new month, things become seasonally negative. We haven't had a weak September tendency for a while, but after the low-volume run-up in August it is a good setup for some softness.

It has been a mistake to be overly bearish too quickly in this market, but that doesn't mean you shouldn't be prudent about some profit-taking. Selling into strength often leaves you scrambling to find long exposure but, as the old saying goes, no one ever went broke taking a profit.

I've been a net seller this morning and have not made a single new buy for the first time in a while. We'll see how things develop as the day progresses, but I don't feel bad about cutting some long exposure.

I'm inclined to be an AAPL buyer at some point but it looks like it is going to crack that $100 support, which will trigger some more stops.

September 3, 2014 ' 8:21 AM ET

Key In on Individual Stocks

  • They are the crucial element -- not big-picture worries.


Life is really simple, but we insist on making it complicated. --Confucius

The market is setting up for another positive open as buyers jump in on news that Russia and Ukraine have agreed to a ceasefire. The market had never sold off on the negative news on the conflict, so you might think there wouldn't be much of a response to this development. But, in the current market, all news is good news and any excuse to buy is a solid one.

The only thing that has really mattered to the market recently is that the economic situation is still so poor in Europe that the European Central Bank is working to devise another stimulus program. The U.S.'s recent better-than-expected economic news has not been a factor, because the Europeans are going to keep pushing those interest rates lower. As long as interest rates stay under pressure, the buyers are going to be keep looking to put money into equities.

The toughest thing about this market right now is that the indices are obviously extended on thin trading volume. The major averages haven't made much progress over the last week, and that is helping to produce some consolidation, but it is still very thin technical support and rather tepid momentum.

The big positive is that a high level of speculative action remains, as market players are aggressively pursuing a number of individual stocks. There are some impressive pockets of momentum in such names as Tesla (TSLA), Facebook  (FB) and Digital Ally (DGLY), and there is strong underlying support for many momentum names. The dip buyers are very active, and they seem to be rooting for weakness so they can really load up on some of their favorite names.

All the bears out there are focusing on the big picture, and there is no shortage of things for them to worry about. Economic recovery remains extremely slow, there is unrest around the world and we haven't seen a 10% correction on the S&P 500 in more than three years.

So the temptation to time the market based on the macro picture remains very great. If you want to make a bearish argument, it is painfully easy -- and that is part of the reason that it isn't working. Everyone knows the bear case. These folks have been making the same argument for many years, and it hasn't mattered one bit to actual market action. Lately the thinking is that the Federal Reserve is on the brink of more hawkish action regarding interest rates on U.S. Treasuries, and that this is sure to turn the tide. But, thus far, such chatter has had no impact on the market.

The best way to deal with this market is to simply stay focused on the individual stocks that are performing well. Those stocks don't care about the big-picture bears right now, and neither should we. When those stocks start to act differently, that will be the time to be less bullish. This strategy may not seem clever or sophisticated, but that is the way you make money in this market. The market timers are the ones who are struggling, and there is no reason to play that game.

Stay vigilant and watch your positions. They will be the key to navigating this market.

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At the time of publication, Rev Shark was long AAPL.

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