A Rough Week for the Bulls

 | May 16, 2014 | 4:26 PM EDT
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A late bounce on Friday afternoon that was probably short-covering or option-related helped the indices to end the week on a positive note, but it still was a very rough week for the bulls. The most significant development this week was that the DJIA and S&P 500 came off their all-time highs and exhibited some of the corrective action that has been plaguing the broader market for a couple of months.

High-profile hedge fund manager David Tepper was blamed by some as a catalyst for the poor action, but the more likely cause was that the divergence between the big-cap defensive names and everything else had just gotten too extreme. Somehow the performance gap had to close a bit, and the end result was selling of big caps rather than buying of momentum stocks and small-caps.

Traders seemed quite desperate for even a minor bounce today and were almost giddy over the late-day strength but for a market as oversold as this one is the bounce was awfully mild. Breadth did improve to about 3,400 gainers to 2,300 losers, but there was little standing out in the way of momentum.

While many traders are hopeful that we are finally seeing some bottoming action, there still is nothing to signal that a change in trend is about to occur. In fact, some upside here could set up a very painful failed bounce if overanxious traders are overly aggressive. It would be nice to have a little better countertrend action, but overall we need to continue to respect the fact that the trend is down. Have a good weekend. I'll see you on Monday.

May 16, 2014 | 10:25 AM EDT

Fading Fast

  • Just bide your time and wait it out.

The good news is that there isn't any downside follow-through this morning. The bad news is that the market barely has a pulse. Breadth is running 2,450 gainers to 2,700 decliners and there is minor strength in retailers due to J.C. Penney (JCP) and Nordstrom (JWN), but there simply isn't any buying interest. Dip buyers, who could hardly wait to buy after a day like we had on Thursday, have no interest at all. In fact, minor early strength is starting to fade as I write.

What happens in an environment like this is that traders use increasingly shorter time frames and end up flipping things so quickly for a few pennies of profit that we never are able to get much of a bounce going. We saw this most of the day yesterday and we are seeing it again this morning.

I am doing absolutely nothing as the setups just aren't there. The easiest thing to do in a market like this is force trades out of boredom. Just bide your time and wait it out. Things will eventually improve and we'll quickly forget the misery of this dead market.

May 16, 2014 | 8:09 AM EDT

Still No Indication of a Major Turn

  • It is the market's job to prove itself to me.

Bear and endure: This sorrow will one day prove to be for your good.--Ovid

After hitting all-time highs on Wednesday the DJIA and S&P500 have pulled back sharply. That is good news as it helps to end some of the inconsistent behavior in the market.

It also pushes us closer to a bottom in the great bulk of stocks that have been correcting for more than two months now. We needed to see bullish sentiment to drop further and that required that the senior indices take a hit.

It is highly unusual for corrections of the magnitude we've had to be so well hidden for so long. There are always times when we'll have rotational action that covers up the true nature of the market. But seldom do we have stocks hit as hard as many momentum and small-cap names without having a greater impact on the indices.

What is particularly interesting is that Investor's Business Daily will have deemed the market to be in correction for 30 trading days, which is the longest stretch of time since 2008. That is certainly a change in character from the quick and easy V-shaped bounces we have had so many times in the intervening years.

While the action looked quite poor Thursday, and we still clearly are in a downtrend, there was one major positive which was that small-caps reversed and showed some relative strength. We actually had money moving out of the safety of big-cap stocks and looking for value in the speculative small-cap names. There still isn't much that looks good technically but at least we did have some signs of minor support.

At this stage in the market correction we will hear more and more predictions about how things will play out. There are the pessimists like Tepper and Acampora who are talking about a long, ugly summer. But there are plenty of optimists too who think that the selling is close to running its course and that a rebound is looming.

My strategy is to not try to anticipate what is going to happen. All I know is that the market is acting poorly and there is nothing happening yet to indicate that a major turn is about to occur. I want to protect capital and be ready to be aggressive when conditions improve.

One of the favorite games on Wall Street is to try to guess the exact minute that the market hits bottom. It probably causes more losses than anything but the appeal of being the timing genius is too hard for the egos on Wall Street to forego. We will hear endless talk about 'buying opportunities' in every downtrend and there will be thousands of premature calls that the worst is over.

I don't know when we will see an uptrend again and I'm not going to spend much time trying to guess. What I will do is stay patient, identify stocks that I like and be ready to be more aggressive when the action is improves.

While it is possible that today may be the day that the market finds a bottom, I don't think it is likely. I'm not going to bother with any predictions. It is the market's job to prove itself to me and it has plenty of work to do.

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