Assessing Wednesday's Damage

 | Jul 28, 2011 | 10:00 AM EDT
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Some pretty serious selling hit the major averages on Wednesday, as the market voiced its displeasure at the slowness of debt-ceiling talks in Washington, D.C. Investors also didn't like what they saw in the Fed Beige Book, an anecdotal look at economic activity around the country. Growth slowed in eight of the Fed's 12 bank regions in June and early July.

The Nasdaq led the way, falling 2.65%, to 2764. Volume on the NYSE and Nasdaq rose sharply from Tuesday's levels, with NYSE volume clocking in at 1 billion shares and volume on the Nasdaq rising to 2.36 billion shares. The tech index shows six higher-volume declines since July 11. It was the third straight decline for the S&P 500 in which volume rose from the prior session. The benchmark index now also shows six higher-volume declines since July 11.

The S&P 500 closed below its 50-day moving average, a key support level, while the Nasdaq ended just above it. If you've got some nice gains in your portfolio, now might be the time to start thinking about taking some money off the table. That's what I've been doing with my model portfolio, which is only about 30% invested at this point (about right, considering all the uncertainty that's in the market).

In today's fast-moving markets, bullish charts can turn ugly in a heartbeat. I find myself having to refresh my watch list on a daily basis. One day, it looks like a stock is setting up for a possible breakout; the next day, it gets hammered on heavy volume. It's a tough market in which to make money, which means that inaction is probably the best course of action for now.

It's also a "death by a thousand cuts" market, which means if you tend to cut losses short in a stock rather than let a small loss get bigger, then you've probably been cutting losses a lot lately. The bottom line is that if you buy a fundamentally and technically sound stock in this type of market, the chances of a short-term profit fading to a loss are pretty good.

If you've been buying stocks in recent weeks and have been cutting losses frequently, listen to the market's message, which is a clear one: Stay on the sidelines until uncertainty subsides. It's not easy to do, but it's the best game plan for now. Taking multiple small losses can add up over time.

As Wednesday's action showed, sellers are still in around in spades. It's not hard for sellers to exert influence when there's a lot of institutional money on the sidelines still hesitant to enter.

Despite widespread damage Wednesday, a few names hung in there. Interestingly enough, they were high-quality names that gapped up in price after reporting strong earnings recently. Shares of Google (GOOG), for example, fell 2.5%, to $607.22. Volume was slightly above average, but the stock held its 10-day moving average at $599.33. Its 20-day moving average is all the way down at $563.21.

With the broad market on the ropes, it's too early to start nibbling at Google if you don't own it yet. After the company's earnings report, it's a stock I want to own, but I need to see underlying market health improve more. This will come in the form of institutional buying, but again, I'm just not convinced that institutions are ready to step in here.

Intuitive Surgical (ISRG), which makes the da Vinci robotic surgical system, also reported blowout earnings and continues to trade well after its gap up on July 20. There's been some volume behind its four-session losing streak but I'm not expecting a meaningful breakdown in this name. Similar to Google, the stock is still trading above its 10-day moving average ($386.19) and 20-day moving average ($377.93).

Selling pressure was quite muted Wednesday in Athenahealth (ATHN), which also gapped up recently on strong earnings. Shares fell $0.19, to $57.57. I wouldn't be surprised to see this name move sideways from here. After a gap up in price, this would be constructive action and would most likely present another buying opportunity. Growth prospects are bright at Athenahealth, which provides billing, collection and medical-record management software to physician practices.

Finally, specialty chemicals company Albemarle (ALB) showed uncanny resilience, falling 0.6%, to $67.96. Last week, the company reported strong second-quarter results. Quarterly profit rose 38%, to $1.23 a share, and sales growth accelerated for the second straight quarter, rising 25%, to $742.1 million. I see a lot of ugly stock charts at the moment, but Albemarle isn't one of them.

Of course, there were some technical breakdowns during Wednesday's session that are worth noting. Panera Bread (PNRA) and Tupperware Brands (TUP) both fell apart after reporting disappointing earnings. Panera gapped below its 50-day moving average, falling nearly 10%, to $116.80. Tupperware did the same thing, falling 13%, to $62.21. The technical damage done to both stocks Wednesday will most likely take a long time to repair.



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