Return of the Big V?

 | Aug 07, 2014 | 10:25 AM EDT
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There was slight nervousness about the better-than-expected weekly unemployment claims, but that has been shrugged off and we have positive action to kick off the day. Breadth is running better than 2-to-1 positive on the NYSE and we have better action in small-caps again.

Small-caps have already corrected substantially compared with the broader market, so the bottoming action in that group is a good sign. It is much tougher for the big-caps to correct when there is speculative interest in small-caps.

IGI Labs (IG), which I mentioned as a good setup yesterday, is breaking out very nicely this morning on good volume. China Dangdang (DANG), a recent Shark technical pick, is doing well and GT Advanced Tech (GTAT) is back on my radar after its recent selloff.

I mentioned yesterday that it has been the second bounce that turns into the V-shaped moves. That is where we are now and at the moment it looks like the buyers are embracing that idea again. 


August 7, 2014 | 09:16 AM ET

The Overall Trend Is Now Down

  • I'm not at all confident that the V-shaped bounce pattern will repeat.

The only real mistake is the one from which we learn nothing.

--Henry Ford

Downtrends are the product of failed bounces. When a market corrects, it will see a number of countertrend moves, but the upside action will be suppressed, as sellers take advantage of the strength to escape positions or establish short positions. The more often bounces fail, the more negative sentiment will become. That is what eventually brings the market to the point of excessive pessimism and an ultimate bottom.

Over the last few years, failed bounces have not occurred as often as they have in the past. That is most likely due to zero percent interest rates and few good alternatives to the stock market. There just hasn't been any place to go but into stocks, which has given us persistent bids and aggressive dip buying.

Dip buyers are a stubborn bunch, especially since that approach has worked so well for so long. What stops dip buying is being caught in failed bounces. After they are burned a number of times, they become far less confident, which results in quick flipping and less aggressive buying.

The big question for this market is whether this current correction is going to gain momentum or will play out like all the other ones over the past few years and be quickly forgotten. Typically, as soon as it looks like we have a solid technical downtrend, we find support and go straight back up. As I've discussed, we have had two corrections so far this year. Both saw one major bounce failure but then found support and the next bounce was the traditional V-shaped move. I'm not feeling at all confident that this pattern will repeat, but we need to keep it in mind as we consider the action.

One of the major challenges now is simple seasonality. We are in the slowest period of the year and many money managers aren't doing much. We also have quite a few big picture issues that are providing excuses for the sellers. That stuff never mattered much when the Fed was being market-friendly, but concerns continue to grow that the Fed isn't going to be the same driving force it was for so long.

We had some good dip buying at the open yesterday, but it fizzled out as the day progressed and there was no energy at all by the time we closed. There are still some stocks acting well like Tesla (TSLA), The Priceline Group (PCLN) and others. We even have some relative strength in small caps for a change, but the overall market trend is now down and that makes long positions tougher.

I'm taking some vacation time over the next week or so, and will be posting sporadically from the road. So good luck and go get 'em.

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