This Negativity Scene Can Be a Positive Thing

 | Jan 06, 2016 | 4:19 PM EST  | Comments
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Stock quotes in this article:

aapl

,

mitk

,

sa

,

watt

After the breakdown and weak bounce on the first two days of trading in the New Year, technical conditions were quite good for more downside. With more poor news out of China and talk about H-bomb development in North Kore, the sellers did not hesitate at all. We gapped down to start the day and made an intraday low with about 90 minutes to go before a late bounce delivered a slight respite.

Regardless of how the indices closed, it was one very ugly day. We had big point losses, ugly breadth, a dearth of bids and lots of talk of bear markets. From a contrarian standpoint, the negativity is a positive thing. The average stock in the S&P 500 is already down 20% from its highs and the average small-cap is down a whopping 30%.

By almost any measure other than the major indices, this market is already deep into a correction and it is getting bad enough that you have to start wondering if we are close to being washed out. I don't worry too much about trying to time turns, but I do prepare myself mentally to be ready to buy when conditions start to improve. This is when a good watch list and a plan of action are paramount. You want to be able to move quickly and decisively as conditions change. That doesn't mean predicting the worst is over. It means be ready to react once there is better price action.

Days like this produce much negativity, but if you are a flexible and opportunistic trader, you should be excited about the opportunities that are developing.  Bad market action is what allows good traders to produce superior results. It is the ups and downs that make it easier to produce relative outperformance.

This price action stinks, but the number of good opportunities is growing fast. Be prepared for more ugliness, but stay optimistic and plan for better days.

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


Jan. 6, 2016 | 12:53 PM ET
Don't Blame Poor Market Action on Korea

  • ·It's a red herring, this market was already undergoing a correction.

People that write about the stock market are always looking for a cause-and-effect relationship to explain what happened. The Fed did this, so the market did that, or jobs numbers were good and that caused this reaction.

It is simple and logical to approach the market in this way, but the reality is that it is often the market that drives how news is perceived, rather than the other way around. The same news under different conditions will result in very different reactions.

We have a good example, today, in the news about H-bomb testing in North Korea. I see a number of headlines that attribute this poor market action to that news. It sounds like a good explanation, but this market was already undergoing corrective action and that news is simply an easy and convenient excuse for the market to do what it was already going to do. In a strong market, news about the crazies in North Korea would have barely caused a reaction. 

This is a market environment, right now, that tends to focus on negatives. It wants to correct, so it focuses on those things that justify such behavior. Since the market is poor then obviously the news must be bad — and that is how it is framed by the media.

We have seen the opposite of this quite often in the last few years. The market has been strong — and therefore all those negatives that the bears keep pointing out are scoffed at as irrelevant.  We focus on making all news good news, because that is the only way to logically explain what is happening.

North Korea is unimportant. What is important is the price action. The price action is forcing us to look at things in a negative light, and that is why we are seeing this downtrend.

 


Jan. 6, 2016 | 11:04 AM EDT

Wait Until the Market Purges the Poison

--Manage risk more carefully as mistakes tend to be punished harshly.

The dip buyers couldn't resist the gap-down open and have been slowly pushing the market higher in morning trading. It is a trade that has consistently worked for quite a while, but more important is whether they have the ability to generate sustained momentum.

The first intraday higher high is being sold; oil inventory numbers appear to be the catalyst. Breadth has not improved very much from early levels but obvious technical support is at the early lows. The longer that level holds, the more confident buyers will be. If intraday lows are broken, look for panic to kick in.

In a market like this, trading style really comes to the forefront. If you are a momentum trading that looks to buy relative strength and new highs, then there just isn't going to be much of interest. The charts need time to develop after a sharp drop. On the other hand, if you are bounce buyer and like contrarian thinking, this is an environment that you will find appealing.

If you are inclined to try to play bounces, you have to be very disciplined. There are big rewards if you are right -- but if you are wrong, the losses can come big and fast. You have to manage that risk more carefully as mistakes tend to be punished harshly.

I focus on stock picking and position trades, and right now this market is offering almost nothing. I want to buy when it is going up, not struggling to find support. I'm going to stay patient and let this market purge the poison that has built up.

A few small-caps on my screens include Mitek Systems (MITK), Seabridge Gold (SA) and Energous (WATT), but there's no reason to do anything aggressive now.

At the time of publication, Rev Shark was long MITK, SA and WATT, although positions may change at any time.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider some of the companies mentioned to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.


Jan. 6, 2016 | 8:08 AM EST

North Korea Nuke, Other Bad News Crack Key Technical Levels

  • The negative news flow is piling up.

"Everybody has a plan until they get punched in the mouth."

--Mike Tyson

The bulls were hoping for another quick and easy bounce on Tuesday. Over the last six years, this market has often made traders feel very foolish when they took a defensive posture as technical conditions deteriorated. We often would bounce right back when were seemingly on the cusp of an ugly downtrend. It happened so often, that Doug Kass' quip about the market having no memory wasn't just a joke.

This time it is different. The negative news flow is piling up and we aren't being rescued by central bankers. We have H-bomb testing in North Korea, more poor economic news out of China, a further drop in oil and commodities and even the mighty Apple (AAPL) -- an Action Alerts PLUS charity portfolio holding -- is cutting production.

The bounce attempt yesterday was anemic and too many bulls were overanxious to try to catch a move. They are trapped this morning and are adding to the downside pressure as they seek to escape. I mentioned that we need to crack the 200 level of the SPY, which is equivalent to the 2005 level of the S&P 500, before we could start thinking about trying to find some support.

The bears have the momentum now and would be in no hurry to try to call a low, but we may have enough downside pressure and panic to create conditions for at least a small snap back. It is extremely gloomy and negative out there, and that is what we need for the purging process to take place.

We have some economic news coming this morning, but what will be most interesting is the minutes of the last FOMC meeting, today at 2 p.m. ET. Many questioned the wisdom of a hike and recent events really have to make you wonder if the Fed knows what it is doing.

It is tough on the market not to have a dovish Fed, but it is even worse to have a Fed that seems not only out of touch but downright incompetent. It creates another headwind for this market that already has plenty of them.

In a market like this my game plan is to simply stand aside and wait for better conditions to occur. I don't try to call bottoms or turns. I respect the downward momentum and appreciate the fact that it will eventually create some great entry points. I said yesterday that there simply weren't any good long side position trades right now, and the action this morning certainly confirms that statement.

It has been a very miserable start to the new year, but it is the nature of markets to go through some hard times. The cycle of boom and bust is inevitable. We need to embrace it and stay mentally prepared for the time when conditions improve again. Navigating the ups and downs is how you produce superior returns.

I expect that bounce buyers will give it a try, but we are building up a supply of bulls that now want to escape. Overhead resistance will be tough. Precious metals are going to be viewed as a safe haven, but the pockets of upside opportunity will be very limited.

It is ugly out there, but it's the nature of the beast. If we appreciate that fact, then we can be ready for the next crop of opportunities that develop.

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