Downside follow-through is a rare phenomenon in this market, but we got a big dose of it today. Despite a couple of minor bounce attempts, it was consistent selling all day with breadth hitting 4-to-1 negative at times. Biotechnology continues to lead to the downside, but it was joined by other sectors that have been leading lately, as well as many momentum names. Even the mighty Apple (AAPL), after an earnings report that had some analysts sputtering about its greatness, is acting like the economy is in shambles.
The big question, of course, is whether this is just overdue corrective action or the start of the major downtrend that so many have anticipated for so long. I have no idea, but I do know that I don't want to sit here with a bunch of long positions and hope. I'd rather cut positions, raise cash and then deal with things as they develop. If the market goes straight back up, I'll be underinvested again but that is the risk when you play defense.
Once again, the senior indices are covering up how bad the action is under the surface. If you just glance at the S&P 500 chart, it isn't even 2% off recent highs. If you focus on individual stock, particularly those that have been recent leaders, there is some real carnage. Facebook (FB), for example, is down more than 7% and now LinkedIn (LNKD) is taking a hit on its earnings report. There are big landmines out there and the indices do not reflect that danger.
Typically, we see a bounce when the market has been hit this hard this fast, but the selling has been a bit more aggressive this time and the underlying support is disappearing quickly. If the price action has a message, it is telling us to be very careful.
Have a good evening. I'll see you tomorrow.
April 30, 2015 | 1:54 PM EDT
Market Slide Continues
- But investors still believe central banks will bail them out.
The indexes have found a little intraday support, and breadth has improved from 4-to-1 negative levels, but there is plenty of red out there and very limited bounce action. The stock that best embodies what is going on right now is Apple (AAPL). It had a good report, but there isn't any interest in bottom fishing it at the moment. You can bet plenty of traders will be keying in on it as a tool to time a bounce. While we've had four days of poor action now starting last Friday, it is interesting how little worry there is about a deeper correction. Many market players don't think it is possible for this market to undergo a real correction. Their main argument is that as long as central bankers are supportive and interest rates remain near zero, there simply is no alternative to equities.
In addition the pattern of the market has been in place for so long now that it is self-fulfilling. Buying weakness has worked for the past six years. There have been a few times when we struggled for longer than a few weeks, but that has been rare, and even in those cases, the folks who bought the weakness were eventually bailed out.
More bears now believe that we are on the cusp of a really nasty correction, but they are simply repeating the arguments we've heard many times before. Maybe the Fed is closer to becoming more hawkish, but around the world, plenty of central bankers still actively engage in the financial engineering that keeps stocks trending higher.
At this point, all we really need to understand is that that the action is poor, and we need to be disciplined and cut stocks that aren't doing what we expect them to do. That may turn into a deeper correction or it might just be another temporary blip. We don't need to guess which it is. We just need to manage positions and be ready to react as conditions develop further.
Apr 30, 2015 | 10:06 AM EDT
- And let this weakness play out.
The computer programs are set to immediately buy gap-down opens like today's. The problem is that they aren't staying around long. In fact, the opening lows are being taken out after a bounce that lasted just 20 minutes.
Overall, this market looks sickly. Breadth is poor with 1,225 advancers to 3,850 losers. Retail is showing slight relative strength while biotechnology, precious metals, solar energy, chips and homebuilders are weak.
The biggest negative is that there isn't any decent leadership. A few stocks are up but there are no strong themes. Virtually every stock that has gapped up on good earnings news has subsequently done nothing -- Skechers (SKX) is about all.
I often say that we need to let the price action be our guide, and right now the price action tells us that we have a problem. We need pockets of positive action to help turn things back up but there isn't anything of substance.
My cash levels are above 90% after a poor week, and I'm doing very little now. There aren't any good long setups. The best course of action is to stand aside and let this weakness play out.
Apr 30, 2015 | 7:35 AM EDT
Apple Action Prime Example of Market Trouble
- It's not a full-fledged downtrend, but it's close.
"I would not know how I am supposed to feel about many stories if not for the fact that the TV news personalities make sad faces for sad stories and happy faces for happy stories."
-- Dave Barry
It isn't the news that is important. It is the reaction to the news that we need to watch and right now it the reaction to the headlines is indicating that we have some problems.
Over the last few years we've typically had positive reactions to the FOMC policy statement. No matter what the Fed did, the market has generally found a way to be optimistic about its intentions. Yesterday, the announcement that the Fed remained on hold and was waiting for further data before it decided on the timing of interest rate hikes generated little excitement and we ended the day with some good-sized losses on poor breadth.
The day had gotten off to a bad start on much-lower-than-expected GDP numbers for the first quarter. The bulls tried to shrug it off as just a temporary aberration due to weather and problems in the oil market, but market players are tired of hearing such excuses and it is downright depressing that six years into a supposed recovery that things are still so slow. The market didn't even care that the bad economic news may keep the Fed dovish for even longer.
What is also problematic is that the reaction to earnings reports have not been very good, overall. Apple (AAPL) is a prime example. By just about any measure it reported great numbers on Monday night. Analysts raised estimates and price targets, yet the stock has traded straight down after a gap up following the news. There have been some good reports as well, like GoPro (GPRO), Google (GOOGL) and Amazon.com (AMZN), but we aren't seeing sustained momentum following the positive news. Market players aren't embracing good news and that is a major warning sign.
The market has been flashing warnings signs since last Friday. It started with underlying weakness in semiconductors and biotechnology and spread to small-caps. Breadth has been poor recently and the biggest problem of all is that the pockets of upside momentum have disappeared. There are a few stocks here and there popping up, like some oil names yesterday, but there is no solid leadership. We are losing key momentum groups like biotechnology, solar energy and healthcare.
If you just look at the senior indices, you won't see anything overtly negative. The S&P 500 was at all-time highs on Monday morning and is still above its 50-day simple moving average. It looks like nothing more than just a minor pullback after a run-up during most of the month of April. The Nasdaq, as well, remains above key support levels, but the IWM cracked its 50-day simple moving average yesterday and is gapping down this morning.
It is the action under the surface, the lack of momentum and leadership and the reaction to good news that is worrisome right now. The market hasn't yet entered into a full-fledged downtrend, but it is on the verge of doing so.
At this point the key is to make sure you cut stocks that are breaking down and failing to hold key support levels. We could bounce back as the market finds some underlying support and we'll regret some sales, but it is a form of insurance and it sometimes we pay a price for it.
This market has issues and the open this morning is confirming them. Be careful out there and don't be too quick to trust a bounce.