Bounces following poor action always generate some excitement, but it is especially so when market players are conditioned to look for V-shaped moves. The fear of being left out has been the biggest driving force behind the market for a number of years, and it really kicked in this afternoon.
What was most notable today was that after outperformance by small-caps yesterday, the buyers shifted back to big-caps and went after retailers, banks and a few other groups they haven't paid much attention to lately. The fact that retail sales missed expectations and that Intel (INTC) cut its forecast was completely ignored. The dollar pulled back and that seemed to be enough to justify some buying.
The media had been blaming the recent weakness on worries that the Fed will be more hawkish when it makes its interest rate announcement next week. Obviously that concern was forgotten today, likely due in part to the computers going to work and pushing the momentum once it started.
The euphoria today reminded me a bit of the action we had on Jan. 8 when the ECB made its QE announcement. The mood was extremely upbeat, but we reversed the next day as concerns about the economy and interest rates returned.
There is a big contingent of folks who will embrace this jump today as an obvious bottom. It is understandable given the nature of the market the last few years, but I'm not totally convinced that we can keep running when we don't have the Fed being uber-dovish.
Have a good evening. I'll see you tomorrow.
March 12, 2015 | 1:15 PM EDT
An Unconvincing Bounce
- · I'm not treating this as the start of a V-shaped move.
This bounce has many market pundits feeling quite excited, but all you have to do is look at how the market acted in January to maintain some skepticism. After the breakdown to start the year we had two very strong bounces, both of which failed before the V-shaped move kicked in during February.
Both of those failed bounces in January were even stronger than the action we are seeing today. However, if you listen to the folks in the media you would think it is clear sailing from here. While that is possible, there is no reason to believe that this is anything but an oversold bounce.
One thing that is easy to forget is that bounces that occur in the context of declines or downtrends tend to be more powerful than those that occur in uptrending markets. People simply aren't as prepared for countertrend moves and they quickly become anxious that they will be left out. That is why most of the biggest one-day moves usually occur soon after an ugly beatdown.
I'm not nearly as thrilled with this action as many of the pundits. The main issue is that we have rotated away from the stocks that were providing some great trading yesterday. It is retailers and big caps that are moving and I don't have much interest in trying to chase those sectors at the moment.
We'll see how things shape up as the day winds down, but I don't foresee loading up at the close. Right now I'm treating this as just an oversold bounce and not the start of another V-shaped move.
Mar. 12, 2015 | 10:17 AM EDT
Sloppy Trading at the Outset
- It's easy to get jerked around if you're too aggressive.
Yesterday, small-caps, biotechnology and semiconductors showed good relative strength in a poor market. Today things are completely reversed, with the big-caps running as retail, drugs and homebuilders lead, Intel (INTC) hurts technology and a few biotechnology blow-ups hurt sentiment in that group. Breadth is very strong with 4,200 winners to 950 losers.
While the action looks much better now, it looks like nothing more than a good oversold bounce after selling off three of the last four days. Of course, the bulls are looking for another V-shaped bounce straight back to highs, but with the Fed on deck and plenty of talk about a higher level of hawkishness, it may not be that simple and easy. V-shaped moves are mostly driven by central bankers, which make things much less clear this time.
I'm working on a few trades but we have a big shift in what is working and that is making it more challenging. Second Sight Medical Products (EYES) is one stock that I'm looking to rebuild on weakness. I also like MEI Pharma (MEIP) in the biotechnology group, which is developing.
There is some sloppy trading and it is easy to be jerked around if you are overly aggressive.
March 12, 2015 | 7:32 AM EDT
Handle Trades Tightly
- Be selective and move quickly.
"Errors like straws upon the surface flow: Who would search for pearls must dive below."
-- John Dryden
On Wednesday, the market suffered its third weak day out of the last four, but there was some mixed aAction under the surface that helped to provide some optimism.
Despite the corrective action in the major indices, breadth was quite good and small-cap stocks showed some exceptional strength.
In addition to the strength under the surface, we also have fairly strong action overseas. Europe is hitting new highs as it rides the ECB's QE program and China is finding some support despite its sputtering economy.
Bank stress tests are giving the financial sector a boost and market players that are used to quickly rebounding markets are looking to try a bounce once again. While the indices did open higher yesterday, the S&P 500 and DJIA faded as they day progressed, but the IWM closed at its highs. It was a very strange mix of action that reflects a continued appetite for speculation.
The phrase "stock-picker's market" is overused, but action like yesterday does merit the label. It has been said that about 80% of stocks are correlated with the direction of the indices, so it's typically a good idea to trade with the trend. While there were shorts that worked, you could have done exceptionally well just picking at some of the small-caps, particularly biotechnology names that were moving against the overall market trend.
While it is a good sign to see this small-cap action, we can't totally dismiss the fact that the major indices are under pressure and in danger of falling into a downtrend. The S&P 500 has already breached its 50-day simple moving average and many pundits are predicting that it will hit the 200-day simple moving average around 200.
The bears are intently focused on the strength of the dollar right now, which is moving primarily as a function of anticipation that the Fed will adopt a more hawkish tone next week. We are pricing in the likelihood that they remove the references to being patient about raising rates in its policy statement. That is spooking some market players who have long thought that a hawkish Fed would be the death of the market.
At this point, we still need to respect the fact that the S&P 500 and Nasdaq are undergoing corrective action. We have a bounce kicking in this morning, but we had one yesterday as well and it didn't hold. We may be due for a relief rally at this point, but there is no reason yet to proclaim a market bottom.
On the other hand, there is some good trading, especially in small-caps and biotechnology names. There were a few blowups in biotechnology last night, namely ACADIA Pharma (ACAD) and Inogen (INGN), which may cool some speculation. But traders keep coming back to the group.
The game plan is to respect the fact that the senior indices are under pressure, but keep digging into the speculative small-caps that are offering some positive trades. Handle your trades tightly and don't worry about trying to time an overall market bottom. There are quite a few negatives out there, but there are some opportunities if you are selective and move quickly.
Early indications have cooled a bit, but are still positive. The dip-buyers are trying, but haven't done that well lately.
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