Not Convinced the Correction Is Over

 | Aug 06, 2014 | 4:40 PM EDT
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The market did a nice job bouncing back from a very poor open but stalled around midday. The S&P 500 closed almost exactly flat, but the iShares Russell 2000 (IWM) outperformed and breadth was solid with about 3,400 gainers to 2,250 losers.

The lack of energy in the afternoon helped reaffirm the recent bearish sentiment, but the dip buying early in the day was a positive sign. As I mentioned, the market has had two corrections so far this year, and both times it has gone straight back up after one failed bounce. I don't think conditions are the same this time, but the pattern can't be completely ignored.

One thing that seems different this time is that the bearish sentiment seems much broader. That is probably due in part to the slow summer trading of August. But we also have quite a few negative headlines to deal with, and they are providing good excuses for those who are inclined to sell.

I'm not convinced that this correction is over, but I am trying to play countertrend bounces in better-looking charts. A few things still look OK, but the overall market is clearly undergoing a correction.

Have a good evening. I'll see you in the morning.

Aug 06, 2014 | 1:11 PM EDT

I've Been Buying

  • The technical action in some individual stocks is pretty good.

The poor open and plenty of bearish talk was exactly what the market needed this morning. It washed out the nervous bulls and provided a good entry for dip buyers who have been looking for some bargains.

Breadth has improved to close to 2-to-1 positive and the mood is much improved.

The question now is whether this is the setup for another failed bounce, like we had on Monday, or will this be the start of the V-shaped move like we had in February and April. 

We've had two corrections this year. In both cases the first bounce try failed and we had a second leg down, but the second time we bounced it turned into very strong V-shaped moves. In February we had eight-straight positive days after the low and in April we were up six-straight days after the turn. I'm not betting that we will run like that again, but it is an interesting pattern to contemplate.

I have been doing some buying today and have added to positions in BioFuel Energy (BIOF), IGI Labs (IG) and a couple others. IG, in particular, looks interesting as it works on resistance at the $6 level. I'm still maintaining a very large cash position, but the technical action in some individual stocks is pretty good despite the condition of the overall indices.

Countertrend trading can provide some very good opportunities and that is what we have at the moment. You don't have to be a bull to appreciate the fact that even the worst markets will have some playable bounces. 

August 6, 2014 | 10:20 AM ET

Nibbling Into Weakness

  • The bargain hunters are getting more aggressive.

The gap-down open was an invitation for the dip buyers to do their thing, but the big issue now is whether they are short-term flippers or bargain hunters looking to build positions. Plenty of folks think a V-shaped bounce could easily develop, but I'm not feeling sanguine about that possibility. I expect the action to be much choppier than in the past as we deal with the slew of big-picture issues upsetting the market.

The good news this morning is that small-caps are outperforming again and breadth is now slightly positive. There's a bounce in oil and chips while biotech and retail lag. Tesla (TSLA) continues to be the momentum starter, but Chipotle (CMG), Google (GOOGL) and a few others are perking up as well.

China stocks continue to be the best-acting speculative group, and I'm watching a few in that group, including (WBAI).

I have been holding a high level of cash, so I am inclined to do a little nibbling into weakness. I'm not doing anything big but I've starting building Zeltiq Aesthetics (ZLTQ), which went straight down following an excellent quarter, and Steel Dynamics (STLD), which is in the hot steel sector.

Bargain hunters are starting to get more aggressive, but the sell programs have been the big danger lately. Stay vigilant.

Aug 06, 2014 | 8:02 AM EDT

The Fed and the Red

  • The red on the screens is caused by the perception of a more hawkish Fed.

Some of us think holding on makes us strong; but sometimes it is letting go.

--Herman Hesse

After another day of selling, the major indices are now clearly in a downtrend. Our weak one-day bounce failed miserably, as hopes of a V-shaped move quickly fizzled out and market players moved to the sidelines. The selling hasn't been overly aggressive, but it has been steady. There isn't much interest in dip buying.

The Russia-Ukraine situation is receiving most of the blame for the weak action, but there are a variety of other issues causing pressure as well. As Jim Cramer notes this morning, the failure of a couple of big mergers and the pullback by Walgreens (WAG) from an inversion merger are causing headwinds.

I continue to feel that the biggest problem for the market right now is that there is enough economic improvement to make the Fed a bit more hawkish and less supportive of continued accommodation.

The Fed is what has driven this market up for so long, and it's the Fed that is going to be the main driving force when we come down. Many bulls still believe that it is premature to start anticipating that the Fed is going to be less market friendly, but the price action is telling us something, and it is hard to argue with it when there is so much red on the screen.

It is likely that the mood about the Fed will continue to shift and, when we do see a good bounce, it will be justified to some extent by the belief that the Fed will still be extremely accommodative even as the economy improves more.

The Fed will be the main driver of this market for a long time to come and unfortunately nervousness over its direction combined with a slew of big picture negatives is driving the market down. Keep in mind that the technical conditions are playing a big part in this corrective action. It isn't the news that drives the market, but the market that drives the way that news is perceived. We were set up technically to be more vulnerable to poor news, and that is why it is having more of an impact that it might otherwise have.

The good news is that this correction will give us healthier action down the road. We need to purge excess now and then, and that is what we are doing. The buyers will eventually regroup and another uptrend will develop, but we have to let this play out.

This poor open is the sort of thing we need to wash out the market and set up better bounce action. The level of negativity is increasing much faster now, and there are many bears who are now proclaiming that this is the start of the big correction they have been anticipating for so long.

All we need to know right now is that the market is undergoing a correction and we need to play defensive while it plays out. The biggest mistake people tend to make in an environment like this is the desire to call a bottom. You don't need to time the exact low to make money. You simply need to focus on protecting capital and then inch back in as the price action improves. There will be plenty of opportunities to make money after things improve. There is no need to time a turn with great precision.

This weak open is likely to attract some dip buyers, so be ready for a bounce. Whether it sticks is another matter, and the potential for a V-shaped bounce has diminished quite a bit. 

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