It was a poor day for the indices but an even worse day for underlying stocks. There was some carnage as the dip-buyers made just one feeble try to bounce this market. The good news is that the indices are still above key technical support at the December lows, but the charts don't provide much confidence. If you really want a negative spin, you can argue that some head-and-shoulder-top formations are developing.
Once again the DJIA grossly misrepresented the broader market, which is mainly a function of money looking for safety in big-cap, dividend-paying names. The momentum and more speculative names were a disaster. My momentum screens were better than 5-to-1 negative. Speaking of momentum, the one group that has been the safe haven for the aggressive money has been biotechnology. That group turned hard today as the hot money ran for the exits. Without the biotechnology group, we have practically no upside leadership.
Yesterday it looked like oil might be close to putting in a bottom, but the bounce failed miserably today. That added to the downside pressure already created by today's Swiss bank fiasco.
Precious metals did well on the Swiss bank chaos, and we saw strength in chips. Intel's (INTC) earnings beat has market players hoping the good news will spill over into the sector. Intel earnings have often marked a key turning point in the market, but in recent years it has been less important. It still has the potential to create a market theme.
Overall, this market is in sad shape and there is strong potential for further downside. It is oversold enough for a bounce, but if something doesn't develop soon, there will be more market players anxious for an exit.
Keep an eye on Intel. Have a good evening. I'll see you tomorrow.
Jan. 15, 2015 | 12:57 PM EST
Bad Markets Don't Scare You Out
- They wear you out.
It's downright dismal out there. Most notably there are new intraday lows after one bounce attempt this morning. The folks who have lived off V-shaped moves that last few years are finally starting to have doubts whether that can continue.
Also notable, biotechnology stocks have finally lost some momentum. Bluebird Bio (BLUE), Kite Pharma (KITE), Juno Therapeutics (JUNO) and OvaScience (OVAS) are being hit hard and selling is picking up steam. This group has been such an obvious momentum leader and was quite frothy, so it is not a big surprise to get a sharp reversal.
I've often said in the past that bad markets don't scare you out, they wear you out. We are starting to see that sort of disgust, which is a good thing. Big-volume, capitulation bottoms are rare. Most of the time, market turns after a sharp drop come in rather undramatic fashion.
I reiterate that the best approach is to play defense and stay patient. In this market environment we are often tempted to take trades simply because we are anxious to do something. It is very easy to suffer nicks and cuts when things are this ugly.
The market is making new intraday lows; don't be too fast to anticipate a bottom.
Jan. 15, 2015 | 10:30 AM EST
Ready for the Fat Pitch
- Look to make new buys.
After a very wild pre-open session, in which futures were highly volatile, it has been straight-down action. We opened slightly positive, but the selling since then has been relentless. We have yet to see any bounce try. Breadth is running about 1,600 gainers to 3,500 losers, but we are losing the momentum in biotechnology, and the momentum list is almost 10-to-1 negative. It is defensive names and precious metals that are leading.
What seems to be going on is large algorithmic programs are doing trades involving oil, commodities, currencies and futures. That has created huge volatility and given the action a very random feel. There just isn't any easy way to game the action.
As I discussed in my opening post, the key to dealing with this action is to stay patient and wait for your pitch. However, it is key that you play strong defense. If you are struggling with stocks in a downtrend, it is tough to be aggressive with new buys at the right time. Usually, you just end up breathing a sigh of relief when the stocks that you rode down bounce back. You will have a completely different perspective, if you are looking to make new buys, rather than focusing on recovering losses.
I'm doing nothing at the moment. While this action is quite ugly, the potential for some good buys has me feeling quite optimistic. It is just a matter of waiting for things to set up and being ready to swing at the fat pitch.
JAN 15, 2015 | 6:53 AM EST
The December Lows Are in Sight
- One more push lower will easily cause a breach.
"The stock market is a no-called-strike game. You don't have to swing at everything -- you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"
--Warren Buffett
Oil bounced and the indices closed well off the early lows on Wednesday, but it was the seventh negative day out of nine trading days so far in 2015. Sellers have had plenty of good excuses for dumping stocks such as plunging oil prices, deflationary fears and tepid economic growth. Yesterday the bad news continued with poor retail sales, unimpressive earnings from big banks and a huge drop in copper prices.
In the past, the market hasn't worried much about bad news because there was always a central banker willing to make promises about more and bigger quantitative easing. Many market players are expecting such an announcement from the ECB next week, but so far that anticipation isn't doing much to help the market.
Ultimately it is the price action that tells the story of the market, and right now it isn't a very happy tale. We had a big two-day bounce last week, which was driven by dovish comments by a dovish Fed member, but we haven't had a positive day since then. We are still holding above some key technical support around 2000 of the S&P500, but the December lows are in sight and one more push will easily cause a breach.
Under the surface the action in individual stocks has been a mess. Biotechnology stocks have been the one safe haven, but just in the past week we lost home builders and retailers as poor news hit. Many of the big cap technology names that are viewed as somewhat defensive have been struggling for a while, Google (GOOGL) and Tesla (TSLA) being two good examples.
The biggest problem with this market is that there just isn't any good leadership outside of some biotechnology. The market is contracting rather than broadening, and that leaves us with very few long-side opportunities.
So how do you deal with this market? You wait for your pitch. After you have made the necessary defensive moves and raised some cash you simply have to be patient and watch for the right setups to occur.
Too many traders make this overcomplicated. They are sucked into the idiotic commentary in the media, which always focuses on trying to time bottoms. That makes traders overly anticipatory and they start making emotional moves. That problem is even more common in this market, because everyone is so aware of the tendency toward V-shaped moves. No one wants to miss out if another occurs.
The most important thing to keep in mind is that you don't need to predict what is going to happen to the market. You simply need to wait for conditions to develop and then react as opportunities occur. It is a function of patience and vigilance.
We have some downside pressure again this morning, as oil dips again and European stocks sink after the Swiss national bank dropped its currency exchange cap with the euro. Swiss markets were down over 8% and suffered their worst loss since 1989.
The bottom line is that there are plenty of negatives, and no help from central bankers at the moment.
