The market was surprised to receive some early indications about the European Central Bank (ECB) decision due out tomorrow morning, but it didn't produce very impressive action. The senior indices did manage gains, but the Russell 2000 (IWM) lagged and Nasdaq breadth was negative.
While the indices are choppy and inconsistent, my main concern about the market continues to be the unimpressive action in individual stocks. We just don't have any good leadership and the pockets of momentum are practically nonexistent. Today, many of the high-momentum biotechnology names acted poorly which is particularly worrisome since they have been the primarily leaders for a while.
The big concern is that the ECB decision tomorrow will generate a "sell the news" response. The action today lends some credence to that possibility as there was plenty of poor action under the surface. Betting against the central bankers has been an extremely poor play for a very long time, but we may be at a point now where the market is finally starting to accept the idea that they aren't having any real impact on some very severe problems.
We'll see what happens on the news in the morning. The likelihood is that we are going to see some pretty wild volatility rather than the tradition V-shaped move.
Have a good evening. I'll see you tomorrow.
Jan. 21, 2015 | 1:44 PM EST
ECB News Presents Trading Challenges
- It's been a mistake to anticipate a 'sell the news' reaction.
Many traders have been predicting a "sell the news" response to tomorrow morning's European Central Bank (ECB) announcement. With the news today about the proposed play we are starting to see some signs that market players are inclined to sell into strength produced by the announcement. While the response to the news has been positive, there is some mixed action out there and momentum is limited.
While NYSE breadth is running two to one positive, breadth on the Nasdaq is even. Oil is leading, as an oversold bounce kicks in and there is some strength in the semiconductor sector. We also have some good bounces in names like Facebook (FB) and Alibaba (BABA) that is helping quite a bit.
The big danger here is that the ECB news is going to mark a change of market character. Over the years it has consistently been a mistake to anticipate a "sell the news" reaction to central banker actions. We have typically run on the Fed, even when its actions have been highly anticipated.
The way this market has been acting so far in 2015 it would not be a big surprise if yet another QE announcement isn't a driving force. That doesn't mean we will fall apart, but it is going to present some trading challenges for folks who are used to a V-shaped move.
Overall, the action in individual stocks is not very impressive and that is going to prevent me from holding much inventory into the ECB news.
Jan. 21, 2015 | 10:31 AM EST
What to Make of the News So Far
- Central banks are outdoing themselves this morning.
We have a very interesting morning so far, as news reports that the European Central Bank's executive board calls for bond purchases of roughly 50 billion euros ($58 billion) a month, which would last for a minimum of one year, hit the waves.
This is the news that was expected to hit tomorrow morning, so market players are scrambling to readjust expectations. The ECB's executive board has to decide on the proposal and that decision will be announced tomorrow.
While U.S. stocks' first reaction to the news was positive, European markets have reacted negatively so far. There has been quite a bit of fear about a "sell the news" reaction to the ECB, and we may be seeing it occur now.
In addition to the ECB, the Bank of Canada cut rates, which was not anticipated either. That also gave us a slight boost, but the market action out there is very sloppy and inconsistent.
What bothers me most about the market is how narrow it is and how we lack good leadership. There just aren't many pockets of momentum for traders to choose from.
I'm trying to get a few things going but it is very tough to be aggressive as I'd like. I added some Tower Semiconductor (TSEM), which has an attractive chart, and also Tekmira Pharmaceuticals (TKMR), which is building a high level base. Memorial Production Partners (MEMP) is my main oil bottom-fishing play, and that is slowly moving out of a decent base.
We'll see where we are later in this day, but right now putting money to work is very challenging.
Jan. 21, 2015 | 7:37 AM EDT
Don't Get Over Excited About ECB
- Follow the advice of Austria's central banker.
"(One) shouldn't get over excited about (the ECB decision on Thursday)."
--Ewald Nowotny, ECB Governing Council member.
The market managed an intraday reversal on Tuesday, which has given us a little two-day bounce. It was some refreshing action after the brutal start to the year but the big issue now is whether we can continue to build on that as we await the ECB decision on quantitative easing early tomorrow morning.
It is a good sign to see the indices close near the highs for the third time in four days, but this bounce action hasn't produced much confidence that another V-shaped bounce is on the way. There simply hasn't been the attitude that this market is going to start running away to the upside and leave the underinvested bulls behind once again. Of course these V-moves have consistently been quite surprising, so it is hard to completely discount the possibility of another developing especially if the ECB is a positive catalyst.
Tomorrow morning we will finally hear some details about the ECB's long-awaited QE program. Maria Draghi has been hinting that this has been coming for quite a while and the news is now very well anticipated. The market has rallied sharply on just hints of European QE in the past, and the recent bounce is likely caused by some positioning in hopes of another positive response.
While we wait for the ECB decision, we have a few earnings reports of interest. Netflix (NFLX) is blasting higher as it surprises once again. This isn't the first time the stock has acted this way. It tends to attract chasers and has a good chance of sustained momentum.
On the other end of the spectrum is IBM (IBM), which issued disappointing guidance and is gapping down. This is a major component of the DJIA and is likely to weigh on the index today. E-bay (EBAY), American Express (AXP) and SanDisk (SNDK) will be leading the reports tonight.
While there is quite a bit of news flow out there the overall market isn't offering much opportunity at the moment. Upside leadership is very limited and the pockets of momentum outside of biotechnology stocks are nearly nonexistent. Charts setups just aren't there right now. The rather anemic bounce of the last couple days doesn't inspire much trust and with the ECB decision tomorrow it is a bit of coin toss how things will develop.
In a market like this the bears have to be given some respect. We are so used to quick and easy recoveries that it is rather difficult to remember how technical patterns like we have now can easily fail. We are above recent lows, which is key, but a retest of those levels would be a major negative.
My game plan is to try to stick with the very small group of stocks that are acting well and to be ready to move on the ECB news tomorrow. I'm concerned about a "sell the news" reaction, but we should find some safe harbors in the right stocks.
This is not a particularly easy market right now. The action is narrow, leadership limited and the potential for major news headlines are high. It is easy to be whipsawed if you aren't careful.
Futures are down a bit in the early going and there is no response to the President's State of the Union address.