A Friday bounce with a good close took some of the sting out of a very poor week, but many traders are skeptical that this will turn into another V-shaped bounce. All of the recent V-shaped bounces started slowly and then gained traction, but this time there is a slew of fundamental factors at work, which may make things a bit more challenging.
The bad news this week included more pressure on oil, poor retail sales, an increase in weekly unemployment claims, and the very dramatic move in the Swiss franc. Next week, we have more news on tap, with the bulk of earnings reports starting to roll in, and then the much anticipated European Central Bank QE announcement. The market has moved very strongly on prior ECB announcements that just hinted at QE so the potential for some big swings is very high.
Today's bounce and the strong close had many folks feeling a bit better, but technically we still have some issues out there. We are holding above key support, but the action since the end of January has been much different than anything we've seen in a while. You have to be quite an optimist to believe that we are going to recover as quickly and as easily as we have previously. It certainly is possible that the bulls gun us again, but a high level of skepticism is warranted.
The good news is that there are many good opportunities developing, and earnings season will likely create even more.
It is going to be a busy week, so enjoy the long weekend. I'll see you on Tuesday.
JAN 16, 2015 | 10:35 AM EST
Don't Rush to Declare a Bottom
- Selling pressure has yet to subside.
After the last couple days we are due for an oversold bounce. It started slowly, and we had a quick bounce on a better-than-anticipated Michigan sentiment report, but there continues to be plenty of selling pressure as trapped bulls look to lighten up.
Breadth is good, with about 3,300 gainers to 1,900 losers, and everyone's favorite momentum group, biotechnology, is bouncing back after a rough day. Precious metals continue to run on the Swiss debacle. We also have some bounce in oil as the bottom fishers are growing a bit more optimistic that maybe the worst is over. Chip stocks are weak on the lackluster Intel (INTC) earnings report and retail and homebuilders are struggling on worries about economic strength.
In a market like this there are always traders looking to catch a bounce, but what determines how the market acts is whether they are flipping for pennies or anticipating that we are finding significant support. The V-shaped bounces over the last few years have caused many dip buyers to be quickly aggressive as they don't want to miss out, but in this market that can be quite dangerous if the tendency toward weak closes continues.
I have a few minor trades on my screens but I don't see much opportunity to do any significant buying. OvaScience (OVAS), a recent stock of the week, is acting well and I'm inclined to rebuild that position. Sucampo Pharmaceuticals (SCMP), another biotechnology stock, has a very attractive volume pattern and is on my radar. CNinsure (CISG) was a shark technical buy and is moving well.
The market is weakening already and the S&P 500 is back at day lows. If we don't see better support quickly the stops are going to trigger once again and we'll likely see some margin selling pressure later in the day.
Don't be in a rush to declare a bottom. The selling pressure has yet to relent. The key to trading isn't calling turns. The key is to be aggressive when conditions improve.
Jan. 16, 2015 | 7:28 AM EST
Is the V-Shaped Bounce Dead?
- ECB QE anticipation isn't shoring up equities like it is supposed to.
Out of clutter, find simplicity. From discord, find harmony. In the middle of difficulty lies opportunity.
Early on Friday morning markets around the world are still battling the fall-out of the surprising move by Switzerland's central bank to remove the cap on the Swiss franc. Overseas markets are mostly red, and early indications in the U.S. are slightly negative.
This move and the reaction to it are exposing some of the issues with quantitative easing that bears have anticipated for years. The move by the SNB was done in part to stay ahead of the likely announcement of a quantitative easing program by the European Central Bank next week. The flood of new euros would likely send it lower vs. other currencies and that made it untenable for the SNB to keep a tap on their currency.
This debacle is not only exposing some of the problems with central banker activism but it is causing unprecedented volatility in various markets, as market players try to adjust. Energy, commodities, bonds, equities and currencies are all reacting to what would seem to be a fairly minor matter. It is a reminder of how other market disruptions started with currency issues in other small countries.
The fall-out from these matters is highly complex, but it isn't really necessary that we fully understand what is happening. What we need to focus on is the price action, and right now it looks downright ugly. We closed yesterday near the lows of the day and so far the indices have managed only two positive trading days out of 10 in 2015.
The market is oversold and ripe for some sort of bounce, but when the market is undergoing a real change in character, oversold conditions don't matter much. Once the downside momentum begins to build, we can easily become more oversold as any bounce is quickly crushed.
The question that many market participants are contemplating is whether this action will mark the death of the V-shaped move. Bulls have consistently counted on very powerful recoveries when we have undergone corrective action like we are seeing now, but this time it's a bit different, as much of the action of central bankers is now being questioned.
The anticipation of the ECB's QE program isn't shoring up equities like it is supposed to. Instead it is causing a currency crisis and doing nothing to dispel deflationary fears.
In addition to this currency issue we have had a whole host of weak economic news lately. Weekly unemployment ticked up, retail sales and homebuilding were weak, major banks issued poor earnings report and oil continues to trend downward. Earnings last night from Intel (INTC) were mostly in line, but are seeing a negative reaction. There is an awful lot of poor news, and it is giving market players good reasons to sell stocks that are suffering some technical damage.
So what do we do? When the market acts this way, the immediate reaction of traditional Wall Street and the pundits in the media is to start talking about "buying opportunities." They never warned us in the first place about potential weakness, and if you followed their advice you would never have made any defensive moves.
If you are still holding significant long positions you are in a hole and need to keep in mind the first rule of holes, which is when you are in one, you stop digging. You have to play defense first and foremost in a poor market.
The great thing about strong defense is that it immediately changes the way you view a market downtrend. Rather than being a disaster, it is suddenly the catalyst for some great potential opportunities. If you have adequately protected capital, it is just a matter of staying patient and watching carefully for new opportunities to arise.
At the moment this market is in turmoil and we need to stay out of the way and let it play out. It has been brewing for a while, and is going to make the market difficult to trade in the short term, but we need this sort of action periodically to clear the air and setup the next major market cycle.