Doesn't Feel Like February

 | Apr 08, 2014 | 4:17 PM EDT
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Given the aggressiveness of the recent selling the market was set up to bounce, but it wasn't a very impressive snap-back rally.

The indices were up and breadth was solid, but there wasn't any sense that this was the last opportunity to buy before stocks move higher. Unlike our frequent V-shaped bounces, there didn't seem to be any worry about how hard it would be to put money to work in the days ahead.

We may have another day or two of upside, but the bears are definitely going to be looking to fade this strength. In addition, some stuck bulls are likely to look for exits as well. This action does not have the feel of what happened back in February as we completely shrugged off the January selloff and rallied for eight days in a row.

Probably the most interesting thing about the action today was the failure of biotechnology to rally. The iShares Nasdaq Biotech ETF (IBB) did bounce off the lows, but closed in the red. The great has been destroyed and there still isn't much interest in bottom fishing. There are some good values there, but value is a tough concept when it comes to stocks that may have no earnings.

There continue to be some stocks that I'm looking to buy as the market finds support, but so far I see no reason to think that is happening right now. As earnings seasons starts in earnest next week, we should see a better focus on stock picking. But at the moment the action is still skittish and uncertain and there isn't much interest in trying to cherry pick some long-side plays.

I'm feeling quite optimistic about the opportunities that are setting up but, as always, it's a matter of timing. We just need to make sure we are emotionally and physically ready to move when the time is right.

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

April 8, 2014 | 2:16 PM EST

Better Bounce Action

  • But I'll be stunned if this market does manage to move straight back up.

We are finally seeing some better bounce action, but after the bashing many stocks have received, trust levels are quite low.

Typically our V-shaped recoveries have started just like this, but the damage that was done this time may not be so quickly and easily repaired.

Breadth is solid at better than 2-to-1 positive and we have gold, solar energy, oil and chips leading to the upside. The only group that is struggling again is biotechnology, which is probably the most oversold. Financials are also a bit weak, but the best news is that the momentum names have finally found some buying support.

Back in the old days, prior to the crash of 2008-9, I'd be looking for a bounce at this point to falter and then some retests of recent lows. Some back-and-forth action would produce consolidation and would eventually serve as a foundation for another run higher.

Ever since the Fed has started its easy money policy, stocks don't act that way as often. Typically there are no failed bounces. Once we start to bounce, the cash starts to flow in and drives us right back up. The mood shifts from fear of downside to fear of being left out.

I'll be stunned, as I'm sure many others will be, if this market does manage to move straight back up from here. This does not feel or look like a bottom. The good news is that even if we do have more downside this counter-trend move is giving us some better setups and will help the charts to find some support.  It might not be good action, but it is normal action and that is nice to see.

I've have a few odds and ends that I'm trading. Coffee Holding (JVA), for example, looks interesting as coffee prices continue to jump higher. I still have some small-cap favorites I'd like to add, but I see no reason to start buying them yet. 

April 8, 2014 | 10:34 AM EST

Yes, This Stinks

  • But it's nice to see the market do something different.

The rotational nature of the recent market action has created a difficult situation for dip buyers.

Certain segments, especially big-cap momentum and biotechnology, are oversold enough to bounce. But many parts of the markets have barely corrected at all. What is even worse is that there is still downside pressure on biotechnology and small-caps, even though they have already been pounded.

The leading group on my screen right now is China Internet names, which have been one of the leading groups to the downside. A month ago the buyers would be lining up and looking to chase these stocks higher as they made V-shaped moves, but traders have lost confidence in the ability of the market to bounce that way again.

The SPDR S&P (SPY) and the iShares Russell 2000 (IWM) are making intraday lows as I write. This sort of action is what is going to cause some folks to capitulate. It can be very painful if you have been trying to catch some lows, but there are some exception opportunities slowly being created. Just make sure you keep plenty of powder dry and have a plan of attack as things develop.

This action stinks, but it sure is nice to see the market do something different.

April 8, 2014 | 7:42 AM EST

A Long-Awaited Reset

  • This correction is reason for celebration.

"In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again." -- Chance the Gardener, Being There

The long-awaited market correction has finally kicked in. While the Dow and S&P 500 are just a bit more than 2% off their respective highs, it is the Nasdaq, small caps and momentum names that have suffered the brunt of the damage. The Nasdaq is now coming off its worst three consecutive trading days since late 2011, and the index is now close to 7% off its highs -- but it's the big-cap momentum stocks that have really been pounded. Most of these names are 10% to 20% off their peaks and have suffered extensive technical damage.

While this correction process can be painful if you are heavily invested, it is necessary and inevitable. The market needs to wring out excess, upset the overconfident bulls and reset extended technical patterns. Even if we suffer some losses in the near term, this decline is reason for celebration because of the attendant promise of new opportunities down the road.

The last time we saw a meaningful correction was back in late 2012, and ever since then the action has been particularly lopsided to the upside. There are still many bulls who seem convinced that this market is going to find its footing and go straight back up, as it has done so often over the past year or so. But this time the action has a much different feel, and even when the market does bounce it is unlikely to return to the sort of action we saw in February, when the indices bounced in a straight line.

I often write about a "change in market character," and that is what we're seeing now. It started back in February when leadership began to deteriorate. As we moved into March, the market started losing some key momentum stocks, such as Tesla (TSLA) and Google (GOOG). Then, key sectors such as solar energy, 3D printing and, especially, biotechnology, began to fall apart.

Much of the money coming out of these groups rotated into defensive and value names, something that became an additional concern. The sellers of the momentum stocks weren't just taking a rest and looking to regroup. They were making a major strategic change as concerns took hold about froth and the overheated initial-public-offering market.

The market has probably been hit hard enough now that it is ready for some oversold bounces, but the big issue now is whether we are going to see another V-shaped recovery. Every time I think it can't happen again, it does -- but, this time, conditions no longer seem to support that sort of action. Most notably, of course, the Federal Reserve has slowly started to wind down its quantitative-easing program, which had always been the driver for these quick recoveries.

One of the big problems with the "V"-shaped bounces is that they have been a symptom of the abnormality of the market. They are driven by the central banks, computerized trading, artificially low interest rates and a dearth of human emotions. That said, there is a chance this current correction will finally restore some of the normal emotions to the market. This means we'll see greater ebb and flow in the price action and, most promising of all, individual stock-picking stands to become a more effective strategy.

The good news is that the market is not gapping up in the early going. It is better for sentiment if the indices open soft and then find support intraday. What we need, if we're to see some support under this market, is a continuation of the washout in the early going, and then a strong finish.

There are a lot of broken stocks that have the potential to bounce, but we have to respect downside momentum and not focus too much on the bottom-calling today. The market is sick right now, and it needs some time to find its footing. If we protect capital and proceed with caution, this action will turn out to be a major positive for active traders.

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