If you wanted to see a good example of a "failed bounce," we had one today. The good news is that the senior indices didn't quite undercut Friday's lows. However, support looks precarious and the iShares Russell 2000 ETF (IWM), which has been lagging, already made a lower low intraday and had its lowest close since March 10.
It was all-around poor action today -- poor breadth, big point losses, no intraday bounces and a weak finish. Dip buyers showed little interest and there were no pockets of momentum in which to hide. There are always a few movers like PlasmaTech (PTBI) or RetailMeNot (SALE), but it was just a random handful.
So the big question now is whether this is the much-anticipated correction that so many have been anticipating for so long. Conditions certainly are ripe for some downside action, but this market has more lives than a dozen cats. The bears never seem to be capable of really pressing when they have an edge, and they have one now.
When the market is acting like this, it doesn't take a rocket scientist to figure out that a good course of action is to get out of the way. Your first priority is to always protect capital, and when we have action like this, it means cutting losses and moving out of the way of downside momentum.
The positive spin on this is that a good, hard market shakeup is what is needed periodically to create new opportunities. One of the unhealthiest things about the market in recent years is how we have so much lopsided action to the upside and very little ebb and flow. It simply isn't natural for markets to go long periods of time without some blips and stumbles along the way.
So if you have heeded the warnings and raised cash, you should be feeling pretty good about what is going on right now. It may hurt to hold some longs, but if you are hungry for new opportunities, this is how they are created.
Have a good evening. I'll see you tomorrow.
May 5, 2015 | 12:48 PM EDT
When You're in a Hole, Stop Digging
- ·I'm concerned this could become more than just another pullback.
It is one of those days when market players are asking themselves "why am I still holding this stock?" It is just plain ugly out there and, even worse, it is bad enough to prevent any dip buying action so far.
The computers are still ready to do their thing, so we can't rule out some intraday whipsaws. But the overall trend and tone is negative, and if you're holding long positions, you are taking some hits. My biggest concern is that this could develop into more than just another routine pullback. For years now, we have quickly shrugged off these little bouts of corrective action that can smack small caps and momentum names pretty hard for a short while. We always come roaring back and make new highs.
There is now much more talk about a bigger or more significant change in character. We have a number of factors all converging at once: a poor earnings season, higher interest rates, sluggish economic growth and negative seasonality. Central bankers in Europe and China are still manning the printing presses, but they are not the same driving force that the Fed has been in the past.
I've often warned about the dangers of being overly anticipatory, but that doesn't mean you don't react when there is poor action. That is what we've been seeing lately. I'm not predicting that this is the start of something more severe, but I am ready in case it is. Keep in mind the first rule of holes--when you are in one, stop digging. If you are losing money, cut your losses.
MAY 05, 2015 | 11:02 AM EDT
Stocks, Bonds Under Pressure
•The good news is that selling pressure resolves dull market action
There has been plenty of complaining about how dull this market has been lately, but what is even worse is that we don't have the benefit of the old saying, "never short a dull market." The dead action is being resolved with some selling pressure this morning. While it isn't a big panic, it is definitely unpleasant and there are few places to hide other than precious metals or cash.
Breadth is running about 1800 gainers to 3600 losers, but the momentum screens are much worse and we have biotechnology, semiconductors, solar energy and retail under pressure. The main source of chaos is bonds, which continue to be under pressure. The iShares 20+ Year Treasury Bond ETF (TLT) has cracked support and is now dangling in the wind, as fears of higher rates start to build.
The good news about this action is that it is the best way to resolve the slow and dull action that has been plaguing us recently. Nothing stirs up some good old fashioned emotions like losing money. There isn't any big surge in negativity, but there is some disgust and discomfort and that is what is needed to shake things up.
I'm doing very little. My stock of the week was cash and that looks to be pretty good advice at the moment.
MAY 05, 2015 | 7:38 AM EDT
Wait for the Fat Pitches
- This market is a dull mess right now.
"If there's no drama and negativity in my life, all my songs will be really wack and boring or something."
In the words of Eminem, this market is "wack and boring or something".
The most difficult markets to deal with are often those that are doing little. Market players are geared toward action and are inclined to make moves in order to gain an edge. Quick, decisive, aggressive action can have big payoffs when implemented in a timely fashion, but when the market is dull and slow, it simply can produce churning action that eats away at capital.
The dilemma of the current market is that there isn't anything terribly wrong with the action, especially in the senior indices, but there have been some cracks forming in the foundation that suggest that further upside is limited and some corrective action may be in the cards.
The negatives have been quite obvious. First and foremost, the reaction to earnings reports has been generally poor. There are a few stocks moving on good news, but the more common scenario is Qualys (QLYS), which is gapping down this morning close to 25% after a poor report. The QLYS chart looked great yesterday as it was making new all-time highs.
There have been more than a few disasters like that this quarter, and it has hurt the mood of the market. We have typically done a nice job of shrugging off macro-negatives, as many stocks put up good numbers and the central bankers offer endless support. It is no longer quite as easy and, while we are holding, the pockets of momentum have been contracting and the level of chasing has declined.
It is very tempting to make big predictions about where the market is headed from here. At least if we make predictions, we can feel like we are doing something productive and we can trade with a higher level of conviction. It is much less boring when we have some theory that we can act upon.
The better approach is to simply stay patient and wait for the market to offer more solid clues as to where it is heading. That isn't very exciting when the action is choppy and sloppy, and not much of interest is coming up on the radar screens. In fact, it can feel like we are wasting time and not really doing what we should do.
Sometimes in our work as traders we have to realize that our main task is to simply be patient and stay ready to move only as conditions develop. Even if we wanted to, we simply can't produce productive trades all the time. We need to wait for the fat pitches that we can make some money on without taking on too much risk.
This market is a dull mess right now. It may not look all that bad when you glance at the indices, but this sort of action wears out traders and frustrates many who are anxious to do their job. It will eventually change, but for now we just need to accept the fact that it isn't very interesting and there aren't many trading opportunities for most traders.
We have a slightly negative open on the way and very limited news flow.