Sellers Keep a Firm Hand

 | Nov 04, 2012 | 7:15 PM EST  | Comments
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There's bad, and there's really bad.

Friday's price action in the major averages was really bad, but does it mean the market is bound for yet another leg down? Either way, the move was bearish, no matter how you slice it.

On the bright side, volume on the New York Stock Exchange and Nasdaq Composite fell from Thursday's levels. Friday's session didn't have the feel of intense institutional selling, but the market still remains on the ropes. Bulls are looking for an uppercut and, for that to happen, new institutional money needs to start moving in from the sidelines.

Clearly the Nasdaq is most vulnerable here, as it currently just a few points above its 200-day simple moving average, a long-term level of support. The index is pretty much back to its last breakout area from early August. Its four-day rally attempt remains intact, and it will remain intact as long as the tech-heavy index holds above its Oct. 26 intraday low of 2961.16.

Nasdaq -- Daily
Source: StockCharts.com

While it's true that market bottoms are a process, they're often put in when the major indices flash a buy signal -- a confirmation of a new uptrend in the form of a big percentage gain in higher volume. Buy signals tend to happen when they're least expected, so it's not out of the question for us to see one sooner rather than later.

I actually thought the chances for a buy signal Friday were pretty good, especially after Thursday's strong session, which saw indices finish with strong gains near session highs. Early Friday saw better-than-expected jobs data, but it still wasn't enough to spur a rally. Sick markets tend to shrug off good news, and that's exactly what happened.

Not surprisingly, the broad-based selling accelerated Friday when selling picked up steam in Apple (AAPL). The stock finally took out its 200-day SMA, falling 3.3% to $576.80. Sellers started to come into the stock in spades at 2 p.m. EDT and, in a two-hour stretch, the stock shed 1.5% on volume of 11 million shares. The stock normally trades about 18 million shares in an entire session.

Apple (AAPL) -- Daily
Source: StockCharts.com

The debate continues as to why big investors continue to sell Apple. Some of it represents profit-taking, for sure. But, as I've written before, also weighing on the stock are concerns about the current management team's ability to execute going forward, along with the possibility of slower growth ahead. Uncertainty abounds in Apple, and that's never good for a stock.

Meanwhile, LinkedIn's (LNKD) price action was a perfect example of how institutional investors remain hesitant to put money to work in potential market leaders. It's what the market needs, but it's not happening -- at least not yet. After hitting an intraday high of $115.40, the stock reversed in spectacular fashion, falling $0.06 to $106.78 in big volume.

LinkedIn (LNKD) -- Daily
Source: StockCharts.com

On Thursday the online professional network posted earnings, and the report was a thing of beauty, showing once again that the company's growth story is very real. Third-quarter profit soared 267% from a year earlier to $0.22 a share, double the consensus estimate. Sales came in at $252 million, up 81% and nicely above the average analyst target of $244 million. In the U.S., sales rose 73% to $162.4 million. International revenue doubled to $89.7 million. All this was nothing new -- the company has now reported several consecutive quarters of strong growth.

LinkedIn, which boasts three business segments, now commands 187 million members, up 7% from the second quarter. Revenue at its talent-solutions division, which collects fees from companies and headhunters looking for workers, soared 95% from a year earlier to $138.4 million. Its market-solutions segment sells advertisements, and revenue here rose 60% to $64 million. Finally, the premium-subscriptions segment, which gives users bang for their buck, reported 74% higher sales of $49.6 million. These are great numbers all around, but the broad market remains in a downtrend, making the environment a tough one for growth names like LinkedIn.

For now, I'm content to sit on a relatively large cash position in my Ultimate Growth Stocks model portfolio. I'm watching several names with the potential to become new leaders, but Friday's price action in the major averages was unsettling, to say the least. The risk still outweighs the reward.

Ken Shreve got his start in the financial markets with Investor's Business Daily (IBD). He spent nearly 10 years as an editor and columnist for IBD and its Web site Investors.com.  He also acted as the Investors.com "Market Wrap" anchor and presented IBD investing workshops and seminars nationwide. He continues to provide market commentary on national radio and has appeared on CNBC. He now writes Ultimate Growth Stocks, a weekly newsletter at TFNN, and hosts Breakout Investing, Monday through Friday from 3 to 4 p.m. PT (www.tfnn.com/KenShreve.php).

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