It wasn't a good day for the market as the opening gap up faded and the indices closed red, but it was even worse than it looked. The action under the surface was very poor, with the biotechnology sector in particular taking some nasty hits.
The indices held up fairly well due to some positive action in a few big-caps, especially Apple (AAPL), but most of the more speculative stocks, which have led the market lately, were being sold aggressively. Biotechnology has been the momentum favorite for quite a while, but the bids just disappeared and there wasn't anything else picking up the slack. There were a few China names and a smattering of other things that held up, but breadth was 1950 gainers to 3950 decliners, and the one safe haven was precious metals.
This sort of "stealth" action has not been a positive market. When the indices have shown relative strength when the internal action has turned poor, it usually has not resolved itself that quickly. In fact, each of our last few corrections has started in this way, with the key momentum stocks and sectors showing weakness while the major indices hardly moved.
We have AAPL earnings coming up, which will shift the focus this evening, but after the excitement wears off tomorrow, we'll see if the action today is an indication of a brewing problem. It was ugly out there, especially for the stocks that have performed the best recently, and that is not a good sign.
Have a good evening. I'll see you tomorrow.
April 27, 2015 | 1:17 PM EDT
Negatives Emerge Amid Biotech Carnage
- · Key momentum names may be topping out.
On Friday, there were some niggling negatives under the surface that were being covered up by strong earnings news from some big-caps. Those negatives are becoming more apparent today.
The biggest problem is that our leading group, biotechnology, is being hit hard. This has been the momentum favorite for quite a while. The iShares Nasdaq Biotechnology ETF (IBB) suffered a similar selloff back in March that took the indices down along with it. We found some support and things turned back up over the next month, but the hit today is raising the specter that the key momentum names may be topping out.
So far, the momentum selling hasn't spread too much into other groups like solar energy and semiconductors, but retail and pharmaceuticals are down while precious metals are leading. The momentum screens have negative breadth but a few names, particularly Apple (AAPL), are covering up some of the underlying issues.
Every correction in this market over the past year or so has started with weakness under the surface in momentum stocks and small-caps. They have been the best indicator of market issues. The bulls are still hopeful that AAPL will put things back on track, but there are definitely some issues of concern today. We'll see how we close, but there actually are some signs of nervousness as the carnage in biotechnology continues.
April 27, 2015 | 10:16 AM EDT
Upside Momentum Is Picking Up
- · Anyone hoping for a quick reversal is disappointed.
We don't have any positive earnings news to celebrate this morning, but market players have high hopes for Apple (AAPL), Twitter (TWTR) and a few others that are reporting this week. The indices are up primarily on strength in big-cap technology names such as Facebook (FB), Apple, Twitter, LinkedIn (LNKD) and the like.
Chasing AAPL into its report sounds a bit amateurish, but it has worked in the past and is helping to drive the indices this morning.
Breadth is good and even, although we have a little early weakness after the gap-up open that never seems to last long on a Monday morning. The dip buyers are stepping up as usual, and anyone hoping for a quick reversal is disappointed once again.
Sector-wise, precious metals are leading and we have a good bounce in semiconductors, which were an issue on Friday. Biotechnology is seeing some mild selling and we don't have as much speculative action in small-cap China names although E-Commerce China Dangdang (DANG), Noah Holdings (NOAH), Youku Tudou (YOKU) and a few others are still attracting interest.
Upside momentum is picking up traction as I write, and the fear of being left behind is driving the action again. Market players still seem to hesitate to really embrace this market, but that is helping us scale a wall made up of worries about being left out.
April 27, 2015 | 7:34 AM EDT
A Classic Market Uptrend
- But the action feels artificial and forced.
"You may be deceived if you trust too much, but you will live in torment if you don't trust enough."
Solid earnings news has been rolling in, the indices are making new all-time highs and the economy is still weak enough for the central banks to provide endless liquidity. Is there any reason not to trust that this market uptrend will continue?
Despite obvious positives, the mood of market players is not nearly as upbeat. There are plenty of doubts, despite generally good price action. On Friday, good earnings from Google (GOOGL), Amazon (AMZN), Starbucks (SBUX) and Microsoft (MSFT) pushed the Nasdaq up 36 points, yet market breadth was negative and a number of momentum stocks stumbled. It was mixed under the surface, which gave skeptics ammunition, but the big picture continues to be robust.
The biggest problem Friday was weakness in the semiconductor sector. The chips have often been a group that is an early indicator of broader market problems. They are often one of the last groups to rally in an uptrend and will often struggle when we see toppy action. It is premature to make much of this weakness but it something that needs to be monitored this week.
With the indices making new highs there are indications that underinvested bulls are becoming more aggressive at chasing conservative, big-cap names like Microsoft, which had one of its biggest moves in years on Friday following its earnings news. It may be viewed as a safe haven for funds that have large amounts of capital to put to work.
Overall, what we have is very simple: a classic market uptrend with the indices making all-time highs. When a market acts this way there isn't any good reason to be overly negative. The trend is your friend and that is especially true on new highs. If you are underinvested and having a hard time putting cash to work, you may not like it but that isn't good reason to be bearish.
What makes this market so different is the mood. There simply isn't the degree of bullishness you'd expect to see when the market is acting this way. Market players are positive, but not intensely or deeply. There is plenty of bullishness but it is not at all deep. The sense is that plenty of folks are playing the market long but will hit the sell button at the first sign of trouble.
Market players have come to understand that this action is largely a product of financial engineering. There are many negatives but they have been rendered unimportant because of the power and actions of the central banks. People feel they have no choice but to stay long since all that really matters is the quantitative easing provided by bankers around the world.
While market players are willing to stay bullish because of the central bankers, they remain skeptical. The action feels artificial and forced because economic weakness keeps pushing the bankers to do more. Market players are smart enough not to fight the Fed and other banks, but they would prefer to buy because the economy is strong and companies are doing great.
The irony is that the bullishness is rather tepid and helps to create conditions to keep the uptrend going. Money is still sitting on the sidelines and slowly being sucked in as underinvested bulls feel they have no choice. It is like climbing a wall of worry, but the major worry is fear of being left out as central bankers refuse to let the market soften.
That is where we are as we kick off the week. The trend is up and while there were some niggling negatives Friday, there isn't any reason to believe this market is suddenly going to fall apart. You can concoct a great bearish argument if you are so inclined but until there is a shift in price action, it is futile.
We have the mighty Apple (AAPL) reporting earnings tonight, which will be the focus today, and a number of other reports coming up, such as Twitter (TWTR), which will give us some action.
It would be nice if we had more excitement to go with the fact that the indices are doing well, but the main reason they are doing well is that there is so little strong conviction. Don't be fooled by the distrust of this market. It only makes the uptrend more likely to continue.