After four days of selling, a good sized bounce was not surprising. What was surprising, however, was how quickly a number of stocks became very frothy. Most of the very hot action was in the biotechnology sector, but we had some other big movers as well, including Chipotle (CMG), Ambarella (AMBA) and Palo Alto Networks (PANW). A number of these stocks recovered all their losses from the last week. There were more than 260 new highs, which is quite a few for the first positive day after some severe selling.
Some of this overheated action is a function of market players that are anticipating a V-shaped move and are afraid of being left behind. They tend to favor big-cap momentum names, especially those in the hottest sector, which happens to be biotechnology. There is a big biotechnology conference tomorrow at J.P. Morgan and that is helping to drive the interest.
Despite the pockets of frothy action, the overall bounce was fairly routine. All of the indices are still under their 50-day simple moving averages and have some significant overhead resistance. Of course, resistance has been meaningless when the V-shaped bounces kick in. Quite a few traders seem convinced we are going to go straight back up from here, but the tendency in the past year has been for a failed bounce or two before we head straight up.
Overall, it was a productive day for the bulls and there is no question that momentum is not dead. The chasing in certain areas was so intense it was a bit worrisome, but in the context of the bigger picture it is a positive that there still is so much aggressive buying.
Have a good evening. I'll see you tomorrow.
Jan. 07, 2015 | 1:27 PM EST
Greece is the Word
- Risk of a failed bounce is still running quite high, however.
News that Germany was open to talks about Greek debt saved the market as it was on the brink of testing the intraday lows. We haven't had a good "Greece is saved!" rally in a while and I'm not sure this one has legs either. We still have pretty good breadth at better than two to one positive but the buying is fairly sedate.
There are some stocks on the momentum screens, including Ambarella (AMBA), Illumina (ILMN), Agios Pharmaceuticals (AGIO) and Esperion Therapeutics (ESPR), but I'm wondering about the level of conviction. Momentum chasers want to believe this is the start of another V-shaped bounce but they seem to have some doubts. We'll see what they are thinking nearer the close.
I'm digging through the charts for some new inventory and am not spotting much that is set up the way I would like. A few things such as TG Therapeutics (TGTX) catch my eye but the randomness of this action is preventing aggressive action.
Risk of a failed bounce is still running quite high, especially if we retest the intraday lows once again. However, traders are very worried about missing another V-shaped move and that is helping to provide support.
Jan. 07, 2015 | 10:37 AM EST
- But it's the close that counts.
We have a gap-up bounce on very good breadth, but now the big issue is how much momentum can be gained.
In the old days, before V-shaped bounces became the norm, it was expected that a bounce after the sort of action we've had over the last few days would be sold. Trapped longs would use it for escape, flippers would take gains and shorts would reload. There are good reasons not to trust the first bounce after a breakdown, but the dynamics of this market have shifted in the last few years.
Even though V-shaped bounces have become the norm, each of the five bounces last year had at least one failed bounce before the V-shaped move occurred. If you bought the first bounce after the breakdown, you were burned, and that is where we are today.
Things are fading slightly as I write, but hopes for this to turn into a V-shaped move won't fade until the indices turn red. Already there seem to be worries as the flipping picks up.
I've been dinking around with smaller trades while I wait for better setups. Traders are still looking for action in biotechnology and some of the network security stocks, but we have a lot of green but not much real leadership. Alibaba (BABA) and Twitter (TWTR), which bounced yesterday, are red today.
It is going to be the close that counts. The bulls can easily regroup and make another push but, right now, they need a much better effort to get this V-shaped move going.
Jan. 07, 2015 | 7:32 AM EST
You Need to Time This Market
- It's crucial if you want to produce superior results.
Timing, degree and conviction are the three wise men in this life.
--R. I. Fitzhenry
2014 was one of the worst years ever for relative performance by money managers. According to the Hulbert Financial Digest just 15.6% of managers beat the Wilshire 5000. Investors are aware of the struggles of active managers and have poured a huge amount of money into index funds.
There are a number of reasons why active managers have lagged, such as poor stock picking, but the foremost reason is that they simply haven't been able to navigate market pullbacks and corrections in an effective manner.
Typically, traders and active investors gain an advantage over the indices by timing the market and avoiding market corrections. Traders have to rely on good stock picking to outperform in strong markets, which can be very difficult compared to a fully invested "buy and hold" fund that stays 100% long. Buy and hold will almost always outperform in straight up markets, and that is what we have had for much of the last five years.
What has been so difficult for many traders in the last five years is that the way the corrections and bounces have played out has made it extremely difficult for traders to navigate them effectively.
Typically trend followers will exit the market very quickly at the first sign of trouble. In this market the poor action typically starts with little warning and it is extremely easy to give back sizable gains in the first couple days of a market pullback. That isn't all that unusual, but what really makes things challenging is the manner in which we bounce back.
The standard approach of many traders is to not try to pick a market bottom but wait for a bounce and a follow-through day to signal that the trend has turned back up. Unfortunately, if you have waited for the standard follow-through day, you will have missed much of the move and will have never redeployed your capital.
A good example of the lack of follow-through days was that, after hitting a low on Dec. 16, we never had one as the market ran back up into the end of the year. You'd still be sitting on the sidelines if you were waiting for a confirmation move on higher volume.
This frustration over the inability to time when an uptrend has resumed has helped to create this very strong tendency toward V-shaped bounces. Market players are tired of being left on the sidelines when the market starts to recover, so they don't wait for safer technical conditions to develop. They simply jump in at the first sign of a bounce and count on the market going straight up.
Another thing that makes navigating corrections in this market so difficult is that, instead of having intraday washouts that allow you to enter into panic, we end up with overnight bounces that force you to chase if you want in. It often seems that as soon as you take some prudent stop losses, the market immediately turns and goes right back up.
The indexers and buy-and-hold bulls think that it is arrogant for anyone to believe they can outperform by timing the market. In recent years it has often felt that way, but as we have deeper and more volatile corrections, the advantages of active trading will come to the forefront again.
Timing the market and playing corrections is never going to be simple, but if you want to produce superior results that is the key. Good stock picking will take you part of the way, but managing the market and positions is how you beat the indices.
We have a bounce this morning and the mood is better, but I'm concerned about the potential of failed bounces before we find a bottom. Don't be too fast to assume the worst is over. We are oversold and due for some relief but the potential for another leg down is quite high.