Be Patient and Let the Selling Run Its Course

 | Sep 23, 2011 | 11:30 AM EDT  | Comments
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Like many others, I was encouraged by the market's rally last week. The Nasdaq soared 6.3%, and the Philadelphia Semiconductor Index jumped more than 9%. What was not to like? Growth names were setting up nicely and were in position to move higher. Many of them did. I put money to work in some of them, and they started working almost immediately.

But then came the Fed policy statement on Wednesday, when the central bank decided to use the wording "significant downside risks to the economic outlook." Wow. Talk about calling a spade a spade. The Fed was almost too honest, and the market didn't like it one bit. Clearly, the market is concerned about the health of the U.S. economy and the potential that things could get worse before they get better. It's probably pricing that in now.

Next week, the final revision to second-quarter gross domestic product will be released. The second estimate showed growth of 1%. The market's action over the past two days could very well be pricing in a much weaker number.

The NYSE Composite Index is an underfollowed index, but it's one of the most broad-based indices out there. On Thursday, it showed noteworthy action, as it was the only major stock index to undercut its Aug. 9 intraday low of 6827. It fell 3.6%, to 6728. The Nasdaq still has a ways to go to get to its Aug. 9 low of 2331. It may not get down that far. As of Thursday's close, it was still 124 points above it.

The silver lining to Thursday's session is that a good shakeout occurred in the NYSE Composite yesterday. This could ultimately pave the way for buyers to come back into the market eventually, so don't give up on a year-end rally just yet.

After falling 2.9% on Wednesday, the S&P 500 fell another 3.2% on Thursday: a healthy 6.1% shellacking in two days. The S&P 500 closed Thursday about 28 points above its Aug. 9 low of 1101. The Nasdaq might not undercut its Aug. 9 low, but the S&P 500's low of 1101 definitely looks like it's in play. A shakeout here wouldn't be bad to see either. Pretty soon, selling pressure will get exhausted.

For now, institutional selling has started to make its presence felt in the market again. We saw some of it late Wednesday and a lot of it Thursday. The S&P 500 now shows five higher-volume declines since Sept. 6.

On Thursday, volume on the Nasdaq totaled 2.9 billion shares, above average and also well above Wednesday's level of 2.15 billion. Volume on the New York Stock Exchange, meanwhile, came in at 1.6 billion, above average and also above Wednesday's level. Volume on Wednesday wasn't as high, but it still rose from Tuesday's levels.

Daily volume on the New York Stock Exchange and Nasdaq does a pretty good job of telling me when institutions are actively buying and selling on any given day. They're clearly in selling mode again.

Of course, it's hard to make money when institutions are liquidating positions. Profits can disappear quickly, and losses can spiral out of control in no time if you're not careful, especially if you're in some of the higher-beta names. That's why I prefer to stay out of the way during times like this, when the market is so uncertain and unpredictable.

The action in leading stocks has weakened considerably over the past two sessions. Upside breakouts that looked they had a chance of working, from the likes of Under Armour (UA), Arcos Dorados (ARCO) and Visa (V), don't look so hot anymore, but give Hansen Natural (HANS), Chipotle Mexican Grill (CMG) and Ralph Lauren (RL) credit, as all three continue to trade above recent buy points.

Finally, third-quarter earnings season is fast approaching. It could be a catalyst for the market. While I'm expecting most growth names I follow to report strong growth on the bottom line and top line, I'm a bit concerned about what guidance will look like. I just can't envision CEOs pounding the table about how good business prospects are while the worldwide economy is struggling. Bullish guidance could be the exception, not the rule. I hope I'm wrong.

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