The indices held up reasonably well today and breadth was positive, which had the hopeful bulls feeling more hopeful, but technically the action was nothing more than a rather anemic oversold bounce. The action is a product of anxious buyers trying to catch a bounce, but there is no reason to believe we will be going straight back up from here.
In the past, prudent traders who took defensive action when the price action turned poor would often be frustrated when we'd see a low-volume V-shaped move back up. It wasn't very logical, but the combination of cheap capital created by the Fed and high-frequency trading had to create quite a few of those moves.
Some market players might argue that conditions for V-shaped moves still exist, but I do not believe so. The Fed is no longer a positive driving force and the stocks that usually drive such moves are in poor technical shape. You can't produce V-shaped bounces when names like Facebook (FB), Amazon (AMZN), Google (GOOGL), etc., aren't trending. (Facebook and Google are part of TheStreet's Action Alerts PLUS portfolio. Amazon is part of the Growth Seeker portfolio.)
Smith & Wesson (SWHC), which was my Stock of the Week and was discussed in great detail on Real Money on Dec. 28, continues to be one of the few bright spots in the market. There simply are not many good position trade setups right now. That doesn't mean the market won't bounce, but as far as individual stock picking goes there is little opportunity at the moment.
From a trading standpoint, we'd probably be better off if we broke support at 2005 of S&P 500 and saw another leg down but, of course, there are many bulls praying that won't happen. They want upside immediately and it doesn't matter if it comes out of a poor technical pattern.
This is a tough slog right now. Just give it some time and don't press.
Have a good evening. I'll see you tomorrow.
Jan. 5, 2016 | 1:49 PM ET
This Market Action Is Getting Disgusting
- · Isn't there supposed to be a bounce?
The inability of the market to bounce is creating a very high level of frustration. In recent years, market players have grown used to fairly quick bounces when we are oversold. Downward momentum has not been something we have seen that often. We may have a few back-to-back days, but traders start champing at the bit when we have three or four days of pressure.
In a normal market, we tend to bounce and relieve that pressure and then roll over again as flippers exit and shorts put on new positions. In recent years, this "normal" action has been replaced by computer-driven action that has often created low-volume, V-shaped moves. We have come to expect that sort of thing to continue, and when it doesn't frustration grows quickly.
Although the indices are oversold enough for a bounce, they are in a very precarious position. The key level is $200 on the S&P 500 ETF (SPY), which is equivalent to 2005 on the S&P 500. I don't believe we can have a good low until that level falls and we trigger another round of selling. We may bounce first, but I believe it is highly likely that SPY $200 is not going to hold for long.
While the indices are ugly, it is even uglier when it comes to individual stock picking. We have a smattering of odds and ends that are up and breadth is only slightly negative, but there isn't any good leadership and pockets of momentum are nearly nonexistent. The problem is that sustained upside movement isn't occurring even if you do find some good entry points.
I'm disgusted with the action, but that is the nature of the beast at times. The best way to deal with it is to stay vigilant and wait for conditions to change.
Jan. 5, 2016 | 11:05 AM ET
Bottom-Calling Is a Losing Game
- · There is no need to rush in and buy right now.
After the pounding the indices took Monday, the natural inclination of traders is to look for a bounce. Many were trying to anticipate that action, which is part of the reason for the strong run into the close yesterday.
Unfortunately, the idiotic intervention into the markets by the Bank of China probably prevented a more complete washout and a better setup for a bounce. We may still see some oversold bounce action, but the conditions for V-shaped moves no longer exist to the same degree they once did. Strength at this point is going to be an invitation to flip or to put on short positions.
The most notable thing about the action so far this morning is the weakness in the big-cap FATMAN (Facebook, Amazon, Tesla, Microsoft, Alphabet and Netflix) names. That was our leadership but it no longer exists. Breadth is about even and we have a few odds and ends attracting traders, such as Smith & Wesson (SWHC) and Chuy's Holding (CHUY), but traders do not seem to have any speculative appetite. They are focused on defense and are more concerned about containing losses than looking for new buys.
My game plan is to respect that indices look very poor and undergoing a nasty bout of corrective action. That inevitably leads to great opportunities, but like everything in the market, the key to success is timing. There is no need to rush in and buy right now; there aren't many attractive entry points.
The folks inclined to buy are those that like the idea of buying a stock at the absolute low. There is no way to do that consistently, but that many find that game attractive. I don't care about bottoms -- I care about trends, and it is obvious the trend is down.
Jan. 5, 2016 | 7:25 AM EST
There Will Be Some Very Good Trading Down the Road
- We need this sort of action to create new opportunities.
"The most terrifying words in the English language are: I'm from the government and I'm here to help."
It isn't a big surprise that the leadership in China doesn't trust the free market when it comes to stocks. The People's Bank of China has dumped $30 billion into the market and banned selling by certain large shareholders.
This action caused some stabilization in Chinese equities and has helped to hold up worldwide markets, but there is still a negative bias. Futures in the U.S. are indicating a flattish open in the very early going.
China has tried this sort of intervention before, back this past August, and it did not work particularly well. The Chinese obviously distrust free markets to do the right thing, but ultimately markets always seem to do what they want anyway. There may be some short-term impact caused by this sort of intervention, but eventually market forces will prevail.
The attitude of the Chinese seems to be that intervention will stop panic and manipulation, which will result in greater confidence and more buying. It is primarily an attempt to manipulate emotions and sentiment -- much like what Ben Bernanke tried to do in the U.S. by driving up equities to benefit the broader economy.
The problem is that actions of this sort are short term and they really don't change the fundamental issues that are causing the market pressure in the first place. The sellers are still there, and will produce formidable overhead resistance while they wait for the opportunity to do what they are inclined to do.
China is simply delaying the inevitable corrective action. While it may provide some short-term support, it prevents the market from reaching a solid, tradable bottom. You simply can't trust upside strength to last when it is created in this manner.
What is particularly challenging about the market now is that there is a natural inclination to look for tradable bounces. We are going to keep hearing that things are oversold or near support and market players will work to catch some quick moves to the upside. It is understandable, but we can't forget that these market conditions simply do not favor building longer term positions. Stocks are still grappling with selling pressure and have not found any solid support.
When the market is acting this way it is extremely important to be clear about your trading and investing approach. What happens so often is that short-term trades that don't work turn into longer term investment. It is very easy to freeze and sit there while things downtrend and losses build. It can take a very long time to recover from these sorts of losses and, even worse, they can create a mindset of defeat that prevents you from taking the decisive action you need in order to recover.
While there will be lots of doom and gloom about the poor action, we should actually welcome it and be optimistic about the opportunities it will eventually create. We need this sort of action to create a new crop of setups.
I have no idea how long this creative action will take but I know, without a doubt, that we will have some very good trading down the road as a result.
Proceed with caution from here, but maintain a positive mindset.