What was most notable about the action today was that while the senior indices acted poorly, there was exceptional relative strength in the IWM, and breadth improved steadily most of the day. Traders were chasing speculative junk while selling blue chips like Apple (AAPL), Johnson & Johnson (JNJ) and Google (GOOGL). It is rather peculiar, especially since the put/call ratios were running high, which is a signal of increased pessimism.
Much of the best small-cap action was in small biotechnology again. Traders have been cleaning up in this sector for a while, and although they may have some doubts about the overall market, they are still willing to speculate in a group that has produced good results. It is a good sign for the broader market because it shows there is still aggressive capital looking for a place to go.
If the speculative small-cap action dries up, it will be very worrisome, but typically it tends to broaden out. The conventional wisdom is that when small-caps are frothy it is a sign of a top, but often it is just the reverse, and if the small stuff works, it eventually leads to more money inching into the market.
While there were some bright spots under the surface, the indices don't look too hot. After the pounding yesterday, there was a good opportunity for a bounce, especially with Europe doing well; however, the major concern is the strength of the dollar. You can be sure that will be the headline explanation for what is going on.
The good news is that there are a few pockets of good trading. The bad news is that the market is struggling with a downtrend and there is no reason to believe it won't fall further.
Have a good evening. I'll see you tomorrow.
March 11, 2015 | 1:48 PM EDT
Will the Buyers Stick Around?
- · Fear of being left behind is a big motivator.
It isn't much of a bounce, but the indices are staying in positive territory and breadth has improved to 3200 gainers to 2350 decliners. There is some decent bounce trading, but you really have to wonder if the buyers will stick around.
Keep in mind that the longer the market stays in positive territory, the more likely that more buyers will start to inch in. Nothing motivates buyers more than the fear of being left behind. Almost every active trader out there has found themselves trying to play catch-up with a market that keeps on running following an unimpressive bounce.
I'm definitely not predicting another V-shaped bounce at this point, but it is important to keep an open mind about the possibility. Just when you think it can't possibly happen again, we end up with action like we had in February when the indices were up 10 days in a row.
I continue to do a few smaller trades in names like Synergetics USA (SURG), Supernus Pharmaceuticals (SUPN) and MEI Pharma (MEIP), but we are starting to roll over again as I write, and you have to keep things tight. The current action is nothing more than a relief bounce, and a pretty weak one at that.
March 11, 2015 | 10:31 AM EDT
A Good Day for Fast Trades
- ·Long-term buys can wait.
The early bounce attempt is anemic, at best. Great concern over the strength in the dollar continues, and there is worry that next week the Fed is going to remove the language from its policy statement about being "patient" with rate hikes.
Those are the reasons given for the poor market, but at least breadth is positive with 2,900 gainers to 2,200 losers. Biotechnology, chips, drugs and solars are leading while precious mental and energy are lagging. It isn't very strong but there is upside effort.
I'm not inclined to believe that this corrective action has run its course, but that doesn't mean we can't try some countertrend bounces. Lion Biotechnologies (LBIO), a recent Stock of the Week, is my most aggressive trade right now, and it is acting well. SunEdison (SUNE), another recent stock of the week, is ramping up on news of a deal in Japan. I'm fooling with a few other small plays as well but it is all short-term stuff that I don't plan to hold for long.
This market is oversold enough for a little bit of a relief bounce, but I'll be watching for another rollover that takes out this morning's low. It's a good market for fast trades. Longer term buys can wait.
March 11, 2015 | 7:16 AM EDT
The Million-Dollar Question
- Does QE in Europe and China put a bid under the US market?
"Our monetary policy is certainly supporting the recovery."
-- Mario Draghi, European Central Bank President
Since it bottomed in 2009, the market has undergone a few corrections. But over the past two years, the deepest correction has occurred in a three-week period this past October. The S&P 500 fell 7.6% from high to low before bouncing straight up and making a new high within a few weeks.
In the context of history, that barely qualifies as a correction, but it is what market players have grown used to in the era of quantitative easing. Markets simply don't stay down for long when there is an endless supply of cheap capital and few good investment alternatives.
The big question is whether the breakdown over the past three trading days is the start of much more notable correction or just another in a long line of temporary setbacks that ultimately provide the foundation for the indices to hit new highs.
The bears are much louder this time about conditions being different. They are pointing to the strength of the U.S. dollar and a more hawkish tone from the Fed. The thinking has always been that higher interest rates would eventually lead to a deeper market correction, and that is finally causing anxiety among bulls.
While the U.S. is seeing an increase in hawkishness, the rest of the world is still very much involved in pumping up the supply of cheap capital. China's economy continues to show signs of stress while the European Central Bank is just starting to execute its bond-buying program. Europe is enjoying its biggest bounce in six weeks this morning as the third day of QE is driving the action.
Does European and Chinese monetary easing put a bid under U.S. securities and offset the strong U.S. economy and the more hawkish Fed? That is the million-dollar question. The QE celebration in Europe is why we are bouncing this morning.
We need to do two things right now. First, watch for lower lows that signal downside momentum is growing. If this early bounce is sold quickly and yesterday's lows are taken out, then we have a real change in character and reason for worry.
Second, keep in mind is that this market tends to have extremely one-sided price action once it regains its composure and is in an uptrend. Be ready with a list of potential buys to act on quickly if, and when, conditions improve.
There is no reason to be overly excited about a bounce this morning, but it is important to be ready to put capital to work if things hold. The easiest mistake to make after two very poor days is not to be ready to buy long positions.
My game plan is to continue to give the bears the benefit of the doubt and not be too trusting of the early bounce. I want to have a good list of potential buys if the trading tone improves, but I'll manage them tightly and dump quickly if the indices make new lows.
In my style of trading I don't try to guess when the market will bottom. I want to catch a trend, not a turn. Right now, the trend to the downside is developing but it is necessary to be aware of how quickly the market has reversed in the last few years. Deep corrections have been rare, and we shouldn't be too quick to assume that "this time is different." That doesn't mean we jump in fast and load up, but we need to be mentally prepared for fast improvement.
A decent bounce is shaping up in the early going but there's a very long ways to go to recoup the punishment served up Tuesday. Trapped bulls are likely looking for exits into strength.
