After some of the ugliest action of the year, the market managed a pretty good bounce to conclude the week. It probably helped that it was Friday and the first day of a new month, but it was an energetic move on decent breadth and a strong finish. Small-caps lagged but momentum stocks were mostly green and the biotechnology group managed a nice-size bounce.
Typically a bounce like this would be very suspect. Many folks were caught this past week in some ugly reversals and the psychology is to look for an escape into strength. Cutting a stock to minimize your losses and eliminate a source of anxiety is what overhead resistance is all about.
Of course, that is antiquated thinking in the age of computerized trading and financial engineering. Rather than worry about the possibility that a downtrend might develop, the major concern is jumping back on board so you aren't underinvested when we shrug off the negatives and go straight back up.
One thing that is different this time is that the pressure is largely a function of earnings disappointments. Even those stocks that did beat expectations didn't do so by enough to generate any real momentum, and those that missed, like LinkedIn (LNKD), were pounded. The market has consistently ignored any and all negatives due to the dovishness of central banks, but that is no longer driving things as hard.
If you look back to January 2014, you will see about eight times when we had some corrective action. In every case, we had at least one failed bounce before we turned back up and made new highs. My gut feel is that we have some rollover again next week to make sure the bulls aren't too overconfident about the lack of risk in this market.
Have a great weekend. I'll see you on Monday.
May 1, 2015 | 10:27 AM EDT
Another V-Shaped Move Coming?
- · Maybe, but I'm not going to do much chasing at this point.
After some extremely ugly action, market players jump back in as if there isn't a worry in the world. It is typical for this market to have a complete change in attitude overnight, although there hasn't been any fundamental reason for it. In fact, the poor report from LinkedIn (LNKD) could easily have been used to justify more pressure on momentum stocks.
So far, we have the complete reversal of what occurred yesterday. Breadth is quite strong, biotechnology is leading and oil is lagging. There is good strength in semiconductors, drugs and retail. The momentum list is running 90% green and Apple (AAPL) is back in positive territory.
The bulls, of course, are saying "I told you so," as they count on another V-shaped move back to all-time highs. The prudent traders, who played defense as support levels in individual stocks were breached, are debating whether they should chase this open or do we see the failed bounce that the recent action would suggest?
We are starting to slow down as I write, and breadth has already slipped a bit. The key is that we don't fill the opening gap, but the iShares Russell 2000 (IWM) has almost done that already, and the indices are back to opening lows.
I've often written that it is unlikely that we will see another V-shaped bounce and have been proven wrong. However we have had a tendency over the last few years to have one or two failed bounces before the V-shaped move finally kicks in. What is always surprising is how lopsided the buying becomes when we do start to trend upward, but it has been a good idea to not be too impatient in looking for a V-shaped move.
This correction has a different feel to it as there have been some very big hits primarily due to earnings reports. It isn't just nervousness over the Fed, interest rates or the economy in Europe or China. It is core valuations that are under pressure, which is a new development.
We'll see how things develop, but I'm not going to do much chasing at this point. SolarEdge Technologies (SEDG), which I mentioned buying yesterday, is moving nicely this morning and I've cut that back a bit.
May 1, 2015 | 7:07 AM EDT
This Is Some Nasty Correction Action
- The corrective action that we've suffered this week feels different.
"A wise man adapts himself to circumstances, as water shapes itself to the vessel that contains it."
During the last couple years, market players have handled market pullbacks quite well. They don't panic as we suffer technical damage, and have been optimistic that the indices would regain their composure and continue their upward trek. Those that were quick to play defense often found themselves scrambling to put money to work when the downtrend failed to develop and the market turned back up.
The corrective action that we've suffered this week feels a bit different. It started last Friday, just like most of the other recent pullbacks, with some niggling negatives under the surface. Semiconductors and biotechnology stocks lost momentum, but good action in the senior indices covered it up. The poor action under the surface continued this week, as the reaction to good earnings proved problematic. The best example is Apple (AAPL), which posted a very good report on Monday night and had the analysts sounding quite upbeat. The stock gapped up on Tuesday morning, but reversed hard and is down more than 5%.
There has been a slew of other poor reactions to earnings news from Chipotle (CMG) to Google (GOOGL). The latest disaster is LinkedIn (LNKD), which is being pounded after a significant cut to forward guidance. As I mentioned yesterday, there are only a few stocks that have gained any momentum after putting up good reports this quarter.
This poor reaction to earnings is coming against a backdrop of increased concern about the timing of the Fed's interest rate lift-off. The policy statement on Wednesday didn't change anything, but while the Fed isn't being hawkish, it is no longer being the driver of liquidity that it once was. The dollar, Greece, economic issues in China and some surprise strength in Europe are all contributing to the problems that the market is suffering.
If you simply glance at the senior indices, particularly the S&P500, it doesn't look that bad. The chart isn't even back to April lows so far, but it did breach the 50-day simple moving average and there is technical distribution as volume increases.
The true state of the market right now is best reflected in individual stocks, which look downright terrible. Biotechnology, which has been our momentum leader for quite some time, is down around 10% and the ranks of momentum names have been decimated lately, as the impact of poor reactions to earnings news spills over.
The disaster that is LNKD this morning is the sort of thing that helps downtrends to develop further. This is a stock that has been an institutional favorite despite an aggressive valuation. Chasing expensive stocks has been the only way that big funds can put money to work in this market, but now they are paying a heavy price and are going to start questioning the potential for other expensive, momentum names to suffer in a manner similar to LNKD.
The indices are oversold enough for some sort of bounce, but the risk that things roll over again is extremely high. The bulls will be talking about another V-shaped move as soon as we have some green on the screens, but the damage that is being done to individual stocks may not be repaired so easily this time.
We are undergoing some nasty correction action, and this time there are some aspects to it that suggest it may not come to a quick conclusion.