The market is now 0 and 3 for 2015 and is on a five-day losing streak. Things were looking particularly poor at mid-day, which set us up for a little afternoon bounce, but we fizzled again into the close and were solidly red.
Breadth finished off its worst levels, but still quite poor with 1,650 gainers to 4,200 decliners. The most significant sector action was in biotechnology, which reversed hard after a strong start. Some of the high-flying biotech names like bluebird bio (BLUE), Kite Pharma (KITE) and Juno Therapeutics (JUNO) were chased by the momentum slowed down.
It's interesting to note that some of the lagging big-cap names such as Alibaba (BABA), Twitter (TWTR), and Tesla Motors (TSLA) managed positive action, but overall the big-cap momentum screens were a sea of red. Unlike yesterday, there weren't any easy places to hide. Without biotechnology, there simply isn't any leadership in this market now.
Of course, the main focus of many market players now is to try to figure out when we bottom. They feel lost and are uncertain about what to do, so they start focusing on a potential bounce. It is understandable, but it is a good way to suffer additional losses, if this downtrend gains momentum. Don't be too quick to conclude that the worst is over.
One thing to keep in mind as you contemplate this action is that every selloff we had in 2014 had at least one failed bounce before a big V-shaped bounce kicked in. If you were too quick to anticipate the inevitable run back up to new highs, you suffered some pains.
This is an odd market right now, with oil prices still falling, and bonds hitting levels few had anticipated, in the face of a more hawkish Fed. Basically, the worldwide economy stinks, and endless cheap cash isn't doing the same job it had done in the past.
Have a good evening. I'll see you tomorrow.
JAN 06, 2015 | 1:53 PM EST
No Signs of Bottoming Action
- Be patient and wait for the best entry points to develop.
I expressed my concern this morning about how biotechnology was the one safe haven in this market. Unfortunately, everyone seems to have realized that as well, which was the kiss of death. Biotechnology has rolled over hard and that is helping the market downtrend to gain traction.
While the senior indices are not down as much as yesterday, the underlying action feels much worse. We have traded straight down with just one minor attempted bounce. Breadth is extremely poor on the Nasdaq, with just 480 gainers to 2,220 losers. It is small-cap and momentum names that are leading to the downside, which gives the action a much more negative feel.
While the market is becoming oversold, so far there are no signs of bottoming action. There are still a few biotechs holding up, but there really is no place to hide today. If you are holding inventory, you have losses.
In this sort of action my strategy is to simply stay out of the way and ignore the folks who always try to push you to hurry up and buy. While we may see some sort of bounce soon, the chances that it will fail are high. This action is giving us some great potential opportunities down the road, but we'll need to be patient and wait for the best entry points to develop.
Jan. 06, 2015 | 10:50 AM EST
All About Biotech
- With so many eyeballs on the sector, you have to be a bit nervous.
The dip buyers were ready to go to work but early weakness was needed to draw them in. Instead markets opened flat and had a dismal bounce attempt and now have rolled over on weaker-than-expected factory order and ISM Services numbers. That woke the dip buyers up, who now have the indices at a day's high, but there isn't much momentum, especially in the Nasdaq.
There's still strong action in the biotechnology group, but with so many eyeballs on the sector you have to be a little nervous. We have pure momentum in FibroGen (FGEN), Bluebird Bio (BLUE), Kite Pharma (KITE) and OvaScience (OVAS). Traders are shaking the bushes looking for the next mover in the group and their standards aren't very high.
Biotechnology is the only good momentum group out there, and that makes it very dangerous when there is so much focus on it. It's not as if this group hasn't already had a good run. I'm not calling a top but I'm going to be ready for a quick exit should the group start to reverse. Already I see OVAS, my stock of the week, reversing from early highs.
I like a few small-cap biotech setups, such as Xenoport (XNPT) and Agenus (AGEN), but they need more volume to pop. I also bottom-fished Second Sight Medical (EYES), but don't have much else new on the screens.
Unfortunately, without biotechnology there is little else of interest. Bottom-fishers trying to figure out oil and commodities, but technology is very mixed and there really is no leadership.
Markets are oversold enough for some sort of bounce but the potential of a failed bounce before a V-shaped recovery is very high. Stay selective and make sure you keep stops tight.
Jan. 06, 2015 | 7:52 AM EST
A Seasonal First
- The current correction is a bit different.
I am incredibly bad at predicting the future; I am only smart enough to observe the present and listen to my intuition about tendencies.
--Rem Kookhaas
In 2014 the market underwent five fairly mild corrections. The worst one came in September and October, when the DJIA fell nearly 1500 points or 8.4%. In each case we had a failed bounce or two before we made a good low, but that was then followed by a straight up, V-shaped bounce back to highs.
The current corrective action is a bit different. First and foremost, it is occurring at a very odd time of the year, seasonally. This is the first time ever we have been down the last two days of the old year and the first two days of the New Year.
Action this time of the year is always driven by subjective considerations, like taxes and portfolio balancing rather than macro considerations, but this time the collapse in oil coincided with the market pressure. An additional factor has been that computer-driven trading programs took greater advantage of the thin trading and jerked us around more than usual.
Each of our prior corrections had been led by collapses in momentum and small-cap stocks. This correction has been driven more by falling oil and commodity prices. We also saw selling of some of the big 2014 winners over the last couple days to drive more selling pressure.
A couple positive notes are that there continue to be some positive pockets of action. Most notable, biotechnology has hardly flinched as this selling has played out, and there are a few safe havens in network security and chip names.
In the past it has always been dovish action by the Fed that has put support under this market. Market players have always felt secure that endless QE would prevent any long lasting correction. While the Fed is slightly more hawkish, we now have the potential of bond buying programs in both Europe and China. In addition, bond king Bill Gross has been predicting that the Fed may not even raise interest rates this year.
Long-term interest rates are near record lows, and with falling gasoline prices there is more cheap cash than ever sloshing around. While the weak economies in Europe and China are troubling, we should be very aware that the market is not correlated to the economy. If the market had reflected actual economic growth the last few years, we sure wouldn't be looking at all-time highs.
Should we be looking for another V-shaped bounce once this current corrective action plays out? Many market players thought it was unlikely we would see them continue in 2014, but we ended up with even bigger and more consistent V-bounces.
Given traders' penchant for embracing patterns, it is very likely that they will help to continue the inclination toward V-shaped bounces. Tendencies like this are self-fulfilling, since there is nothing worse than missing out when a pattern is so obvious.
I'm not predicting that the current correction has played out. I believe it is likely we have some sort of failed bounce try first, but action early in the year tends to be very random and we have earnings season quickly approaching as well.
At this juncture, the important thing is that we respect the fact of poor price action and make sure we don't allow losses to build. It is particularly important to be disciplined with money management in a market like this. You will very likely make some poor sales, but it is far more important to play defense than to force offense.
Although overseas markets were weak overnight and oil made a new low, we have a positive open on the way. Many traders were hoping for a gap down open they could buy, but the market never likes to make it too easy.
