Markets Dance to the Headlines

 | Oct 09, 2013 | 4:31 PM EDT
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The DJIA and S&P 500 managed a minor bounce after one of the worst days of the year, but buying interest remained low and many of the recent leaders saw downside momentum. The biotechnology and solar energy sectors, for example, continued to sell off today after big losses yesterday. The stocks that have led on the way up seem to be leading on the way down while money rotates into conservative and defensive names.

There was talk of a meeting between House members and the President tomorrow, which helped bolster things, but the general belief continues to be that they aren't going to be serious about a solution until we are down to the wire on Oc. 17. If it drags on that long, you can be sure we will have more nervous sell-offs.

Bill Gross of PIMCO says the odds of a default of U.S. obligations are a million to one, but the president and the media are going to continue to make sensationalistic predictions about a disaster to manipulate public opinion. The market has done a good job of ignoring this stuff, but the fear is that it may sell off for invalid reasons and those losses are just as real as those caused by valid reasons.

Be prepared to dance to the headlines. We'll have a resolution at some point, but you can bet it won't occur until we are down to the wire. Stay vigilant and flexible.

Have a good evening.

Oct. 09, 2013 | 1:33 PM EDT

Negative Momentum Grows

  • The market gets uglier.

The indices are giving a very misleading picture of the action today. There continues to be near-panic selling in many of the momentum favorites like Facebook (FB), Tesla (TSLA) and many biotechnology names. Small-caps are also seeing carnage as bids disappear and dip-buyers hesitate.

This poor action is being covered up by a move to more defensive stocks like Procter & Gamble (PG) and Wal-Mart (WMT), which is propping up the senior indices. Breadth isn't too bad with about 2,300 gainers to 3,050 losers but pockets of negative momentum are really making this market ugly.

If you have already taken defensive steps to cut your exposure and protect your capital, it is a great time to start working on your watch lists. The value of a good watch list is that it allows you to act quickly and decisively when the action improves. If you know the names you want to go after, you can be much more aggressive catching turns as they develop.

FB is at the top of my list as a "go-to" name when the action improves. I believe it will bounce quickly when the pressure is off this market and benefit from a strong Twitter IPO.

There are also small-caps like BioTelemetry (BEAT), my Stock of the Week, which I want to rebuild as it shows signs of holding key support levels. Small-caps tend to lag when on sharp, news-driven bounces but they are often priced inefficiently and can offer more opportunity if you manage them right.

No one really expects a possible resolution in Washington until next week, so it can be dangerous to build positions too early, but now it pays to be ready in an advance and to cultivate the right mindset.

Oct. 09, 2013 | 10:33 AM EDT

Bottom-Fishers Beware

  • Looking for a low is not enough.

It has been a very long time since we have had this sort of negative action. Follow-through to the downside has seldom been an issue in the last few years, which is a big reason the dip-buyers have consistently been so aggressive. The bears have almost never been able to press when they have an advantage, but it is working for them today.

Most notable this morning is that bids have completely dried up and a number of stocks are in free-fall. Biotechnology and high-beta big-caps in particular are being hit hard. Sarepta (SRPT), for example, which I'm looking to rebuild, was down 7% yesterday and is down nearly 9% this morning. We have often seen that sort of momentum to the upside this year, but seldom to the downside.

I'm in no big rush to jump in, although we are going to see a positive headline out of Washington sooner or later and the rush will be on. Right now, the market is still struggling to find support.

My plan is to work on a shopping list and make a few small buys to stay focused. Names like Facebook (FB) and Tesla (TSLA) should bounce fast and hard when the market turns up, but the small-caps that are being crushed now, like NQ Mobile (NQ) and JinkoSolar (JKS), are easier to add when the market action improves.

If you are inclined to bottom-fish, make sure you do it small and slow. The key isn't to buy a stock at its low but when it has the best chance of sustained upside.

Oct. 09, 2013 | 7:58 AM EDT

Momentum Turns Negative

  • That means increased caution and capital preservation,

"Reader, suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself." -- Mark Twain

It took longer than many thought it would but the market was finally spooked by the deadlock in Washington and suffered some of the worst selling of the year.

What was particularly notable was that it was the high-beta leadership stocks that were slammed. These stocks have held up extremely well and barely blinked when the indices corrected in August. They have been a safe haven for aggressive bulls but Tuesday the Investors Business Daily's list of 50 top stocks sold off 4% and suffered its worst loss of the year as the hot money fled.

This sort of change in character usually suggests that more of the same is to come. Momentum works in both directions, and when leading stocks abruptly reverse those who rode the momentum up tend to sell first and ask questions later. There is usually a big gap between the points when momentum sellers sell and bargain hunters start to buy. The folks who tend to favor momentum stocks tend to have strict rules about cutting losses and that tends to accentuate their downtrends once they start to break down.

What is a little different this time is that we are so highly focused on the political debate in Washington. Up until Tuesday, the bulls were providing support as they anticipated that a deal would be done sooner or later but they lost their patience Tuesday. When the selling picked up, stops were triggered and even the optimists felt that it was prudent to stand aside until there is some progress in Washington.

This morning we have a bit of a relief bounce on the news that Janet Yellen will be named the next head of the Federal Reserve. This is seen as market friendly as she is widely viewed as being supportive of quantitative easing. Despite her support of aggressive policies, The Wall Street Journal notes that 'she has a record of being concerned about excessive inflation.' 

That certainly is a good combination for the market and will help to ease some of the worries over tapering. This appointment is not a surprise, however, and probably has already been priced into the market already.

All that really matters to the market right now is a possible deal in Washington. We had some panic over it Tuesday as the parties seem to be talking past each other and making no progress at all. But this is not unusual in those sorts of debates. The breakthroughs don't normally come until the last minute, and that is still a week away.

What we have to do is navigate through this waiting period. It is often said the market hates uncertainty and that is what we have to deal with right now. The potential for another leg down is quite high, but there will be dip buyers who hope to load up in front of a news of a deal. We are going to be highly sensitive to news headlines and neither bulls nor bears will be able to be too comfortable.

I'll be working to identify individual stocks of interest, but the market is now under pressure and momentum has turned negative. That means increased caution and capital preservation. Ultimately, it should lead to some good opportunities but we have to navigate short term landmines.

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