A Change of Character

 | Apr 17, 2013 | 4:32 PM EDT
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The hallmark of a downtrend is a failed bounce, and we definitely saw one the last couple of days. Rather than pull off another of those V-shaped moves that confound so many market players, we had a good old-fashioned reversal. In retrospect, the move yesterday was a routine oversold bounce, which was an opportunity for bulls to exit and bears to press. They did that aggressively today.

The big issue now is whether this is just a little correction that has run its course, like the perma-bulls on CNBC assure us, or the start of a downtrend that could persist. As a trend-follower, my view is that this market has rolled over and we have little choice but to give the bears some room. That means don't rush to buy and look for selling of strength rather than buying of weakness.

It is important to keep in mind that downtrends aren't just the inverse of uptrends. Stocks go down differently than they go up, so you can't trade in the same manner. In downtrends, the downside moves tend to come much quicker and the biggest bounces usually occur in the context of a market that is trending downward.

Earnings reports didn't help much today but we have a full slate for the next couple of weeks and that is going to push things around. So far, earnings news has not looked very impressive and we'll have to watch for that theme to persist.

It is time for defensive action, but that doesn't mean you don't keep working on shopping lists and preparing for buys down the road. The market has undergone a change of character and if we respect that and protect capital, it will put us in good position for big gains in the future.

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

April 17, 2013 | 2:12 AM EDT

A Technically Broken Market

  • I'm inclined to respect it and slowly build new long positions.

The breaking of $400 by Apple (AAPL) was what the market finally needed to reverse. Buyers lined up to jump in when stop-losses were triggered and it's been bouncing nicely since then. It is still very ugly but the market is off the lows and we are seeing a little dip-buying.

The bad news is that the market has suffered real technical damage for the first time in a while. The good news is that real human emotions are at work. The market is acting in a way that reflects feelings of fear and greed. The routine oversold bounce was actually sold rather than turning in to a V-shaped move. That might not seem like a positive if you are holding many long positions, but it is far more logical than what we often see.

I have not done a lot today as I'm holding a high level of cash. I did average into First Solar (FSLR) but I'm taking my time with new buys. We have a technically broken market, and I'm inclined to respect that and slowly build new long positions.

We'll see how it closes, but I'm concerned that the intraday bounce on the break off $400 by AAPL may have started a bit early.

April 17, 2013 | 10:45 AM EDT

Powered by Solar

  • The group has performed well amid today's market decline.

Action in the early going is extremely choppy and chaotic. The dip-buyers made a little bounce attempt after the gap-down open but were slammed and the S&P 500 went into free-fall. It is still above Monday's low but it looks extremely precarious. Breadth is approaching 4:1 negative and, other than a dead-cat bounce in gold, it is a sea of red.

Apple (AAPL) is in trouble. It is fascinating -- like a car wreck -- as appears headed for the key psychological level of $400. Despite this year's poor performance, many dip-buyers still want to catch this stock, so the action does not bode well for a near-term low.

One group of interest is solar energy. First Solar (FSLR) and SunPower (SPWR) have been performing well and I'm nibbling slowly.

For the most part, I have little interest in building positions. If I can catch some oversold bounces I'll be happy, but the way this market is acting, the trend is definitely turning to the downside and that must be respected. The close today is going to be of particular importance.

April 17, 2013 | 8:20 AM EDT

Pressure Is Building

  • Big picture worries are substantial and there is hesitancy to jump in.

Your fears never go away. You just get more comfortable ignoring them. --Jason Ritter

After a routine oversold bounce Tuesday there is renewed pressure this morning as talk about European sovereign debt downgrades and mediocre earnings reports hit. Bulls who are looking to build on yesterday's bounce aren't finding good excuses this morning.

Typically, a bounce following a big drop should not be trusted as the strength is often a means of escape by bulls and a time to put on short positions by bears. The thinking is that the character of the market has shifted on the big drop and as market players reposition, the reflexive, oversold bounce will quickly fail.

The only problem with that very logical thinking is that it hasn't worked very well since the market low in March 2009. The market has repeatedly bounced after a big drop and just kept running back up. It has caused great consternation and is probably one of the reasons we have had such high levels of bearish sentiment. Market players never really have a chance to build positions during a downtrend. It goes back up so quickly that the bulls remain underinvested and frustrated because they don't want to chase a market that feels artificial and manipulated.

The inclination toward V-shaped bounces simply confirms the idea that the action in the market is not natural. If there wasn't so much liquidity, there would likely be more pressure to sell into bounces but in this market the main struggle always seem to be putting cash to work.

The big question now is whether this pullback and bounce are different than many others we have seen in the last few years.

The first thing that the bears are likely to point out is how the market has dipped for the past three springs, which has been the one big exception to the V-shaped bounce tendency. Seasonally, we have had a great first quarter and then things fell apart as earnings started rolling in. We have also had a pattern of weakening economic data in the spring and that seems to be occurring again.

The second issue the bears are likely to focus on is the collapse in gold, oil and commodities. Virtually everyone will agree that one of the primary driving forces for commodities has been the liquidity created by central bankers. If concern about liquidity is hitting the sector, you have to wonder how stocks can avoid the same fate. Stocks have benefited just like precious metals, oils, and commodities in general from a flood of cash that is looking for a place to go. If liquidity fears are driving commodities down, it is just a matter of time before stocks are affected.

The third problem the bears are going to focus on is just the general weakness in economic numbers. The monthly jobs report was ignored but there is no question that it was weak, and we have not seen good numbers in a while.

We also have the added confusion of earnings. Bank of America (BAC), Yahoo! (YHOO) and Intel (INTC) are trading down this morning. A "sell the news" theme is going to make things tricky for bulls who want that V-shaped bounce.

Many market players are tired of standing on the sidelines as these V-shaped bounces occur, so there is pressure for them to occur automatically. On the other hand, the big picture worries are substantial and there is hesitancy to jump in this time.

I've been frustrated by these V-shaped bounces myself but I'm staying cautious and not anticipating that the bulls can do it again. Every time I think the market can't possibly go straight back again, it seems to occur. But if it does, I'll have to do some chasing and put money to work a bit late.

Be careful out there, it is very choppy.

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