Feels Like a Bear Market

 | Jun 12, 2013 | 4:27 PM EDT
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For the second straight day the market reversed sharply to the downside. This is the worst two days of action this year. It wasn't just the fact that it is down more than 1.5% but the fact that the bounce attempts failed so quickly and completely. That is something we have not seen in 2013.

In the bigger scheme, we really haven't corrected all that much but this feels like bear market action. Breadth was very poor, with 1350 gainers to 4200 losers. Market players are looking for exits and the dip-buyers have completely disappeared.

The best thing to do in a market like this is get out of the way and let it play out. It is far more important that you protect capital in case this downtrend extends. Too often, folks are so focused on trying to catch a bounce that they take on too much risk too quickly. If there are stocks you want to add as they go lower, just make sure you keep plenty of cash available in case there's further downside momentum.

This sort of action looks ugly but it is the nature of the beast. It is part of the normal cycle, and we should accept it, even embrace it, rather than fight it. Ultimately, it will benefit us, but we have to be mentally and emotionally prepared for it.

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

June 12, 2013 | 2:10 PM EDT

The Poor Action Continues

  • I'm not confident that we've seen the lows.

The poor action continues. It went straight down all morning after the gap-up open and has been struggling to bounce. There is no real energy to the dip-buying and breadth has continued to slide.

It is always interesting how quickly the mood of the market can shift. A few weeks ago, the dip-buyers would be jumping in a pullback before the indices even turned red. Now the idea of dip-buying no longer seems so attractive.

Even though this action does not look very good, it is still difficult to short. The likelihood is that we will see some sort of computerized buy program kick in for a quick spike. It is nearly impossible to count on downside momentum to build. Even if the action continues to sink, the countertrend moves will shake out bears who don't give trades a lot of room.

I'm doing very little. I'm a little over 12% invested in managed accounts and while there are some things I'd like to add, they aren't offering any great entry points. My goal isn't to buy the lows but to buy when I feel there is the best chance of sustained upside. I'm not at all confident that we have seen the lows.

June 12, 2013 | 10:42 AM EDT

More Signs of a Change

  • Market focus has turned from buying dips to selling strength.

I wrote in my opening post that yesterday was the first time all year that a big bounce following a gap-down open had failed. This morning we are seeing a gap-open fade faster than at any other time this year. It has been straight down into negative territory after a good-sized gap.

That is the action I have in mind when I talk about a change in market character. The focus has turned away from buying dips and toward selling strength.

Despite the selling, we still have decent breadth on the Nasdaq at 1300 gainers to 900 decliners. Gold and drugs are leading, which indicates defensive positioning, but most sectors are close to flat.

There is still decent action in the small-caps I've discussed lately, Albany Molecular Research (AMRI), Celldex (CLDX) and Immersion (IMMR), but there is little momentum. One chart of particular interest is Vertex Pharmaceuticals (VRTX). It has been in a trading range since a big gap up in April and has been testing $85 overhead resistance lately. News is due any day so there is risk there, but the chart is one of my favorites.

If you are buying, be selective and manage positions tightly. The market isn't going to bail out of bad trades the same way it did earlier this year.

June 12, 2013 | 8:25 AM EDT

Watch for More Failed Bounces

  • They are the essence of a true downturn.

Spectacular achievement is always preceded by unspectacular preparation. --Robert H. Schuller

It is positive but very slow this morning following yesterday's volatile action. Yesterday we saw something we hadn't seen since last November: the failure of a big intraday bounce following a gap-down open. Every time we had bounced back from a poor open this year we have held on to the majority of the gains, so it was quite a change to see the dip-buyers head for the exits just when they were on the verge of pushing the market into positive territory.

Not only was it a shift to have a failed intraday bounce, but the trend of V-shaped moves back to recent highs failed. Following the pullbacks in February and April there were streaks of eight positive days out of 10. Once a bounce started, the buyers became aggressive and did not back down.

The obvious conclusion from the last couple of weeks is that the market has undergone a change in character. Investor's Business Daily confirms that conclusion by shifting its current outlook to "market in correction."

The last couple of times that IBD went to "market in correction" the market ended up bouncing quickly, but this time the pressure has been dragging and there is clear erosion in dip-buying support, a lack of leadership stocks and less aggressive speculative momentum. There are still stocks that are acting well, but it is becoming narrower and the upside follow-through is less robust.

Even if you agree with the view that the market is correcting, that doesn't mean it is going straight down. In fact, the biggest bounces and rallies tend to occur when the market is undergoing corrections. That happens because market players are less prepared for strength and that causes quick spikes when they rush back in.

The essence of a downtrending market is failed bounces. That is what we have to watch for. The intraday action yesterday was a good example of what happens when the market loses momentum. There is a much stronger inclination to sell into strength and for bears to reload as they hit overhead resistance. The thinking in downtrends is "sell strength" rather than the "buy weakness," which is the mantra in uptrends.

I don't want to sound too negative, as a market downtrend is healthy in the bigger scheme of things. We need a shake-up periodically to create new opportunities. It is during this time that the next batch of market leaders comes to the forefront.

One reason I welcome corrections is that they tend to favor stock-picking. There will always be strong stocks and you can put up very good relative performance, if you can find them. I always enjoy this task, so I'll be focusing on highlighting what's working.

It is very quiet this morning and that is likely to continue into the slower summer trading. We'll need to be patient and selective. But if we maintain an opportunistic mindset, we can put points on the board.

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