The Mood Stays Sour

 | Jun 24, 2013 | 4:18 PM EDT
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The mood was sour enough this morning to set up the decent intraday bounce, but it faded into the close and the big picture was not pretty. Probably the clearest illustration of how poor things were was breadth. It was better than 10:1 negative early in the day and then improved, but was still better than 4:1 negative by the close.

The bulls are nervous about further downside overseas. China was slammed Sunday night and you have to wonder if that downside momentum will continue.

Bonds settled down but that didn't seem to do a whole lot for the market. We even had a few comments from Fed members, but this was a very skittish market today. While the dip-buyers finally showed up and to do some flipping, they weren't willing to do much chasing.

Although it closed well off the early lows, the market still finished solidly in the red and it is technically in a downtrend. That is really all you need to know. The market is under pressure and while bounces are very likely, we have to focus on defense and protect capital until the action improves.

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

June 24, 2013 | 12:50 PM EDT

Market Getting Stretched

  • But Fed comments are having little effect.

It has been steady selling all day, but this market is getting so stretched to the downside that a bounce is sure to occur soon. The big issue is from what level.   We are seeing a little underlying support now, but when things are getting beaten up this badly the buyers need to see some levels hold before they are willing to step up.

What is particularly interesting is the comments by Fed member Kocherlakota hardly had any impact on the action at all. I anticipate that more Fed members will be stepping up to say that the market misunderstands their recent policy statements. Given what is going on in the bond market and China, even the Fed may have some difficulty turning the momentum.

My game plan is to continue to stand aside and not be in any hurry to bottom fish. There is some real carnage in individual names I'm following, especially small caps, but I want to see some signs of buying interest before I dip a toe in.  As I often have written, my goal isn't to buy the bottom tick, but to buy when I have the best chance of catching some sustained momentum.

We are off the lows, but breadth is still running better than 10-1 negative. The big problem for a bounce as the day winds down is that margin calls are going to start kicking in. Stay defensive.

June 24, 2013 | 10:23 AM EDT

Get Your Time Frames Right

  • Don't turn a quick bounce into a long-term investment.

When dealing with a poor market like this one, the most important thing is to be clear about time frames. Nothing causes more trouble than a lack of clarity about what your holding periods are going to be. It is very easy for an attempt to catch a quick bounce to end up becoming a long-term investment. Also, longer-term investors tend to panic-sell at exactly the wrong time when they have uncomfortably large positions.

Poor markets create emotional reactions, so if you aren't disciplined and have no guidelines in mind for your trades, there is a higher risk of making poor decisions. This sort of action can offer great opportunity, but you need to be objective and avoid getting caught up in emotions.

There's panicky action in the early going. The tepid bounce try was turned back quickly and breadth is horrendous. There are only 100 stocks on the NYSE that are in positive territory and 270 on Nasdaq. It doesn't get much worse than that, but the good news is that intense selling gives us a washout eventually.

I'm holding a few long odds and ends, which doesn't feel good, and I have no plans to add now. My approach is to buy when the action is better rather than try to catch the low. My biggest long position is Canadian Solar (CSIQ), and I'll be looking to add as conditions develop.

June 24, 2013 | 8:14 AM EDT

You've Been Warned

  • Did you really think liquidity would be endless?

We are optimistic, but we are optimistic in a cautious fashion. --Tom Lantos

The market is off to a very rough start as liquidity issues in China are the focus of concern this morning.

For years the market has enjoyed oceans of cheap cash but in the past week, bond yields have soared and a massive cash crunch has developed in China. Suddenly the idea that we'd have endless liquidity is being questioned and it is having market ramifications around the world.

Market players can't say they haven't been warned. The indices have been downtrending for nearly a month now and a number of key technical levels have been breached. We have had a couple good bounce attempts but both have failed and produced lower lows. That is standard corrective action.

The big issue is whether this is just a healthy correction that is going to run its course fast or the start of a bear market that may persist. Of course, we already have the folks in the media yelling "Buying opportunity!" like they do after every pullback, but many pundits, like Jim Cramer and Doug Kass, are worried that the selling is not over and will last for a while.

My style is not to predict when a trend will end. When we were running up all year, the smart play was not to question the trend but stick with it and respect the price action. The bears that keep trying to predict a market top lost a ton of money and are still underwater.

The market is now downtrending and rather than predict when it is going to find support and turn back up the smart move is to stay out of the way and not worry about bottom-fishing. When we do finally stabilize and the action improves, there will be plenty of time to put cash back to work.

Too many market players fear that if they are not 100% long at the exact moment the market hits bottom that they will miss out. Nothing could be more wrong. First, it is impossible to predict the exact bottom so the folks who play that game always end up jumping in too early and then have to make up hefty losses after the market does turn.

The other thing to keep in mind is that good markets aren't one-day affairs. Trends last many weeks, so if you are holding high levels of cash when the turn finally occurs, you will have time to jump back in and re-establish positions.

What frustrates many market players is that the biggest bounces tend to occur within downtrends and it is very easy to miss them if you are focusing on the overall trend. The key is to make sure that you adopt strict rules if you attempt to play short-term countertrend moves. Don't let a bad trade turn into an investment.

It is very ugly this morning and those who haven't taken defensive measures are already panicking a bit. The important thing is to protect capital and not be in a big hurry to buy downtrending stocks. Keep a shopping list ready and plenty of cash on hand and you will be in very good shape as things develop.

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