While there have been many bearish market predictions for 2015 there weren't many pundits expecting things to fall apart so quickly. The headlines are flashing that this is the first time the S&P 500 has fallen for four days in a row since 2013 and the Dow Jones Industrial Average suffered its worst loss since October.
The ugly action was well reflected in breadth, which was about three to one negative, but there was more positive action under the surface than you might expect. The safe haven today was biotechnology names such as Kite Pharma (KITE), OvaScience (OVAS), Foamix Pharmaceuticals (FOMX), bluebird bio (BLUE), Calithera Biosciences (CALA), Gilead Sciences(GILD), etc. That group seemed oblivious to overall market weakness. In addition, small-caps held up a little better than the senior indices.
The major weak points in the market were oil and commodities. The bottom fishers found themselves trapped and many ended up panic selling as new lows were hit.
The other major weakness was in bigger-cap momentum names that did well last year. It is probably just some delayed selling of big winners for tax reasons. Stocks such as Tesla Motors (TSLA), Chipotle (CMG), Facebook (FB) and Costco Wholesale (COST) are still up substantially from early last year and tax payments can be delayed if they are sold now.
While this poor action today combined with the end of positive seasonality has created a little worry there are still plenty of market players anticipating another quick bounce. So many folks are sick and tired of missing out when the market goes straight up that they make it self-fulfilling. If the market gaps down in the morning you can bet there is going to be some aggressive dip buyers trying to catch a turn.
It may not feel very good if you were caught on the wrong side of the action today, but this is healthy action and there will be better trade opportunities for it happening. Just make sure you manage positions and you have stops in place if things don't work out.
Have a good evening. I'll see you tomorrow.
JAN 05, 2015 | 1:57 PM EST
Negativity Will Allow for Resets
- But don't be overconfident for a quick V-shaped bounce.
This isn't the way seasonality is supposed to work and many traders are moaning and groaning about the action. Typically, we have a strong positive bias around the start of a new year. If we have some weakness to close the year, the market bounces back in the new year and vice versa, but this time not only did we close poorly in 2014 but we are selling off even harder now that the calendar has turned.
However, this isn't another "stealth" correction like we had last year. We have better action in many individual stocks and there is some relative outperformance in small-caps and many biotechnology names. It is oil, retail and technology that are suffering the brunt of the damage.
The question that traders are asking, half in jest, is: "When does the V-shaped bounce start?" This is the sort of action that has consistently led to quick and easy recoveries. One thing to keep in mind is that the last couple of corrections saw a failed bounce before we made a good low and then ran straight up.
Biotechnology continues to be the safe haven, but it is rather worrisome that there aren't more pockets of strength. In a market like this the selling can easily spread to other names that have held up well as market players worry that gains could start to evaporate.
The good news is that this sort of action will give us some resets and allow some new chart setups to develop. It doesn't hurt at all to see an increase in negativity and uncertainty. Fear is building and if we close at the lows that is going to push some bulls out of this market.
Keep those stops tight and don't be overconfident about a V-shaped bounce to quickly bail us out.
JAN 05, 2015 | 10:25 AM EST
New Year, New Look
- Where are the dip buyers?
This year is already looking different than last year. The dip buyers aren't at all interested in the Monday morning gap down, which never lasted for long in 2014. The dip buying was so automatic last year that it is a bit worrisome that there is no interest this morning. It is highly unusual that we have such poor action in the last couple of days of last year and first few days of a new year, which may draw in the dip buyers as the day progresses. But we are creating some negative sentiment, which is a positive.
Early breadth is quite poor with about 1,400 gainers to 4,000 decliners. Strength is in precious metals while oil and retail are laggards.
My focus continues to be biotechnology. This has been the leading momentum group for a while. There really hasn't been any other good leadership lately and if we lose that group, it is going to send the momentum players to the sidelines very fast. We need other momentum groups to gain strength, but nothing much is showing any inclination right now.
Bios such as Kite Pharma (KITE), OvaScience (OVAS), TG Therapeutics (TGTX), Bluebird Bio (BLUE), Xenoport (XNPT) and Idera Pharmaceuticals (IDRA) remain on my radar. One tech name I'm nibbling at is Infinera (INFN), which has strong option action recently. It is sitting at support and I'm looking for some bounce.
The market is stabilizing a bit as a write, but the very weak action in Europe is preventing much bounce interest.
Jan. 05, 2015 | 7:39 AM EST
React, Don't Anticipate
- Be ready to move quickly if market conditions change
"Start before you are ready." --Steven Pressfield
While trading at the end of the year has a positive bias it also can be very thin and random. We often have bouts of profit taking as market players wrap things up and position for the new year. We had good examples on both the last trading day of 2014 as well as the first trading day of 2015. The indices lost some ground on those two days and trading was thin and whippy.
Trading at the end of the year generally has more to do with tax matters and portfolio positioning than it does fundamental, technical or big-picture concerns. It is highly subjective trading and that makes it much more unpredictable and random.
This week we return to trading as the focus returns to outside factors that are likely to move stock. We are kicking off the week with what is going to be a focus all year: the possibility of quantitative easing by the European Central Bank. President Mario Draghi is sending strong indications that the ECB is likely to start buying bonds. Worries over deflation are growing, fueled in part by continued pressure on oil prices and a messy situation in Greece.
The market has reacted very favorably to these indications of European QE in the past but Draghi has teased the markets too often with his promises and now the damage being done to the Euro is outweighing the benefit of more cheap cash.
With the indices suffering mild losses the last couple of days and looking a bit soft this morning, the bears are going to focus on all the negatives. There is no shortage of problems but that has been the case for many years. The problem that the bears always seem to have is that the market just shrugs when they roll out their list of negatives.
The key to effectively navigating this market in recent years is not to buy into the pessimism until it is reflected in the price action. While we need to understand and appreciate the bearish arguments, we have to be careful about actually acting on them until there is some proof that the market cares.
If you had listed to the bears you would have been betting on higher interest rates for years. That has been at the center of all the negative arguments about this market and has been dead wrong.
One theme I will focus on this year is that it is better to be highly reactive to market conditions rather than anticipatory. Trying to guess when the turns will occur will tend to lose you far more money than actually waiting for a change in conditions to occur. That means you have to be ready to move quickly when conditions change but staying with the trend has been the way to make money in this market.
We are off to a slow start this morning but this is exactly the sort of Monday morning action that tends to attract dip buyers. Oil is causing some issues but positive seasonality is helping the bulls.