The conventional wisdom is that volatility increases at market turns. The logic is that market players become increasingly uncertain and that causes prices to jump around randomly. If conventional wisdom is correct, we are in for a hard time.
Since the last two days of 2014, we have had a series of weak closes. Today, we had a particularly dramatic reversal in the indices, although the Dow Jones Industrial Average helped to camouflage what was actually going on with a dead flat close. The swing in the Dow was around 425 points, but a late bounce helped to put some lipstick on this pig.
What was particularly interesting, and rather troubling, was that there wasn't any specific catalyst for the wild swings. Oil actually bounced, so it can't be blamed again, and Alcoa (AA) had a good report. However, there was some bad news from a major home builder that helped cause the turn.
I heard more than one trader lament how difficult it is to trade this market. What would help is that we close weak and then gap down to complete a washout, but that sort of thing never seems to happen as the machines mess up any normal emotional reaction.
The bottom line is that this market is a mess. I mentioned this morning the paucity of leadership outside of biotechnology, and now we have a series of weak closes and an ugly intraday reversal.
The bulls have been continually saved over the past year when the market has been in a precarious position, but if too many of them are thinking we will bounce right back, they are setting us up for something much worse. We don't need to know if this is going to be a major top. We just need to know that it looks poor and we should play some defense.
Have a good evening. I'll see you tomorrow.
Jan. 13, 2015 | 1:14 PM EST
Pay Attention to Intraday Reversals
- They can be a strong indicator of a market shift.
Intraday reversals are key tipoffs that the market may be undergoing a change in character. When the market opens strong and closes weak that is a strong indication that things are starting to shift and that we may want to ramp up our defenses.
So far in 2015, we have had weak finishes on five of seven trading days and we are looking at a very nasty intraday reversal as I write. The Fed-induced spike saved us last week, but the price action has consistently been troubling. It is a pattern that deserves some respect.
The indices are well into the morning gap now. Breadth is still positive, but it is fading quickly. Early buyers are mostly underwater now. We didn't have any strong catalyst for the gap up open in the first place and there isn't a strong catalyst for the reversal. However, comments from KB Home (KBH) on its conference call about softening demand, hit homebuilders very hard and may have helped accelerate the selling.
Biotechnology is still doing the heavy lifting, but there is also some bounce in solar energy and chips. The lack of quality leadership continues to be the big problem with this market. Traders are complaining about the lack of consistency in the action and that is keeping many on the sidelines.
If we finish at the lows today that is going to be a major technical negative. Of course this market has a way of roaring back just when it looks like it is on the verge of falling apart, so too much negativity is probably not warranted right now.
Jan. 13, 2015 | 10:52 AM EST
Get Your Shovel Out
If we keep digging, we'll find market opportunities.
Two weeks into 2015 it looks as if the main theme of the market is sudden reversals. We saw a quick spike last week after a sharp drop and we have another one today after a dismal day Monday.
Market players are scratching their heads as to what the catalyst is for this move as oil is weak again and we don't have any significant economic news. Alcoa (AA) earnings are receiving a little play but that is not a market-mover, although Bloomberg states that its report "spurred speculation that the economy is picking up speed." I suspect the action has more to do with computer programs than it does with AA being an indicator of economic strength.
Breadth is extremely strong at nearly 4 to 1 positive, and we have rebounds in some of the big-cap technology names that have been struggling lately, such as Amazon (AMZN), Google (GOOGL) and Apple (AAPL). Biotechnology continues to be the primary momentum leader with Celgene (CELG) driving the sector.
I'm trying to put cash to work in stocks that have good setups. I've added to my Stock of the Week Tower Semiconductor (TSEM) and to Radware (RDWR). And Retrophin (RTRX) is a thin biotechnology name with an interesting chart. I have a position in Facebook (FB) and will look to add to it on a good close.
The market is challenging but if we keep digging, we'll find opportunities.
Jan. 13, 2015 | 7:33 AM EST
Leadership Is Crucial; It Is Also Missing
- The key is finding good individual stocks.
"When my information changes, I alter my conclusions. What do you do, sir?"
--John Maynard Keynes
Last week the indices bounced back in V-shaped fashion following some dovish comments from the Fed. That convinced a number of market players that we were on the road again to a quick and easy recovery. But the action has been choppy and sloppy and, so far, it isn't looking much like the V-shaped moves we had in 2014.
The biggest obstacle for the bulls continues to be oil. Crude hit new lows last night as it cracked the $45 level. While there are some obvious positive consequences to lower oil, namely gas prices, this dramatic collapse is raising a number of other issues. The primary worry is that, if an asset class like oil can lose half of its value in about three months, what will happen to other assets, like equities, if the bubble pops?
While oil raises the specter of popping bubbles, there is no shortage of other issues, as Europe struggles with deflation and slow growth plagues economies around the world. While employment may be a bright spot in the U.S., economic optimism is still extremely limited.
It is quite easy to produce a long list of negatives to worry about, but that has been the case for years now. There is never a shortage of very profound and logical bearish argument. The issue for traders is trying to anticipate when those negatives will matter to the market.
Ultimately the Fed and central bankers around the world are always out there to offer support when things look gloomy but, as we all know, there will come a day when the market will no longer take comfort in their blandishments.
Are we now at that point were the negatives will finally matter and tip the market into a downtrend? I never like to anticipate market turns, but we do have some issues that we need to watch carefully. The most important thing to keep an eye on right now is leadership. We have had biotechnology stocks leading the speculative charge for a while, but with a much-anticipated biotechnology conference this week, many of the hottest names are looking rather toppy.
Without biotechnology, there just isn't much leadership left in the market. In fact, the collapse in some names that used to be leaders, like Google (GOOGL), Amazon (AMZN) and Tesla (TSLA) is downright disturbing, as they trade in bear market territory.
The indices are still in pretty good shape overall, but some technicians are talking about a head-and-shoulder top, and there are worries that maybe we won't see another quick and easy V-shaped bounce. Last year, many market players also believed that the V-shaped bounce would come to an end and they were proved very wrong. Keep in mind that an easy V-shaped bounce in the last year was preceded by at least one failed bounce like we had the last couple days.
We have a little life out there this morning, as the focus turns to earnings report. Alcoa (AA) is kicking off things with a good beat but it is JP Morgan (JPM) and Wells Fargo (WFC) tomorrow morning that will be much more important to the market.
My main focus right now is to keep digging for chart setups that I can embrace and to not worry too much about overall market direction until the indices do something significant. The key is finding good individual stocks in a market that isn't offering a whole lot of leadership to drive things.
