Nothing Like a Good, Hard Shake

 | Jan 24, 2014 | 4:22 PM EST
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It has been a very long time since the market has had this sort of downside follow-through. We suffered through huge losses as all three indices traded straight down all day on horrendous breadth of better than 8:1 negative. If you were a panic seller at the open, you probably stayed ahead of the game. Almost everything was pounded, with many recent leaders suffering the most.

The good news is that this action will definitely help to wipe out the giddy bullishness that the bears have been warning us about for so long. This action is a painful reminder to many market players that we don't always bounce right back from a weak day. The big question, of course, is how much more downside can we expect?

Although it feels much worse, the indices haven't even corrected 3% so far. In fact, the Nasdaq isn't even back to where it was on Dec. 20. There is plenty of room for further downside and I suspect that fact is what is holding back any dip-buyers today.

The funny thing about dip-buying is that it always sounds like such a great idea when the market is strong. When we have a day like this, the buyers that couldn't wait to buy weakness want no part of it. They will eventually show up again, but we probably are going to need strength before they regain their nerve.

While this action isn't pleasant if you are holding any longs, it is what we need to create the next cycle of opportunities. We haven't had a good purge in quite a while but a hard shakeup will make for more interesting trading down the road. I'm not even going to try to guess how much more the market will correct. All I know is that I want to stay cautious as the momentum has shifted to the downside. Trying to time a bottom tends to attract even more people than timing a top does, but it's a dangerous game to catch falling safes.

We have a slew of earnings hitting next week, including the mighty Apple (AAPL) on Monday night. That should help sort out some of the winners and losers, but given the trend so far this quarter, earnings aren't going to save us unless they improve quite a bit.

Have a good weekend. I'll see you on Monday.

Jan. 24, 2014 | 10:38 AM EST

Sellers Are Definitely in Control

  • The dip-buyers are still cautious after being trapped overnight.

The faint aroma of fear was in the air this morning but things are calming down as the dip-buyers perk up. They are still cautious after being trapped overnight, but they have done so well for so long, they won't give up easily.

The sellers definitely have control of this market. Breadth is around 4:1 negative and the only group doing anything positive is precious metals. The two groups that led early in the year -- biotechnology and solar energy -- are laggards now as profit-taking kicks in.

The big danger is if the bounce fizzles and sell-stops are triggered as the early lows are taken out. The natural place to set stops for traders trying to catch a bounce is at the lows of the day, so we usually will see an acceleration of sales when that level is breached.

I'm kicking myself for not taking more defensive steps yesterday but, like many others, the quick recoveries we have had so often made me a bit less skeptical than I should have been. We have been hit hard enough now that some stocks are hitting support levels, but the key is to buy them when they have a chance of a sustained bounce, but right now this market is very uncertain.

One stock I'm watching for a bounce is Apple (AAPL). After the way it acted yesterday, I suspect it will be a go-to name when we see a bounce.

Jan. 24, 2014 | 8:06 AM EST

A Time for Caution

  • It's getting dangerous out there.

Small mistakes, the lack of care, little accidents, and somewhere a tipping point is passed and things go badly wrong. Expedition history brims with tragedies built out of incremental missteps. --Alan S. Kesselheim

Thursday's selloff surprised quite a few bulls, but it would have been even more surprising if the market hadn't immediately bounced back, as it has so often done. Market players have grown quite sanguine about the possibility of a market downtrend.

In this market, bad action has led to dip-buying rather than fear and panic. Market players are more worried about missing out on buying opportunities than they are about the indices gaining downside traction. When things have looked precarious, the smart move has been to buy, rather than play defense.

The big danger is that, one of these days, the market won't immediately recover -- and, when that happens, all those folks who had dismissed the pullback as just a temporary aberration will sudden find themselves trapped in a market that isn't bailing them out. They will now be stuck in a move going the wrong way. That is when the panic-selling will set in.

Is today the day when the market will remind us that momentum also works to the downside? The high level of bullish sentiment definitely raises the level of danger: No one is really bearish, and why should they be? After all, the market has immediately recovered every time things have started to look a bit shaky. But that high level of bullishness means there is a big supply of people who are going to feed a downtrend if one begins.

In this market, playing defense has been a lost art for a long time. In fact, after a day like last Monday, you may feel downright ridiculous taking some cautious steps, as the market may immediately reverse and recoup all its losses. I often write about defense as being a cheap form of insurance, but it is still painful when you pay that premium needlessly.

The problem we have this time is that market conditions have shifted. We're looking at a slew of negatives, which is nothing new -- but they are starting to matter. Despite Microsoft's (MSFT) report last night and Netflix (NFLX) Wednesday, earnings have stunk. We also have emerging-market issues to deal with in places like Turkey and Argentina, and China is slowing as well. Meanwhile, the Securities and Exchange Commission is going after accountants who audit their books, the Federal Reserve is likely to give us more tapering next week and the U.S. economic recovery is still moribund at best.

This market has done a great job of ignoring all those bearish arguments for a long time, but we have to pay attention to them when the price action begins to erode. The time to worry about them is when they are used as excuses for the selling.

The indices are set for a gap-down open this morning and it will be very interesting to see how aggressive the dip-buyers will be. These folks have had much success for a long time, so I expect them to give it a try -- but if bounces don't hold, and if the market makes lower lows, the danger will greatly increase for some panic-selling.

It is a very dangerous environment out there right now, so be very selective with new buys and make sure you respect your stop losses. There is a time to protect capital and there is a time to pursue opportunities. This is the time to be careful.

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