It was a decent day for the bulls -- the indices were in the green and breadth ran close to 2-to-1 positive. There was even outperformance by the Nasdaq and small-cap indices, which was a nice shift. The bad news is that volume was pitiful, as the Nasdaq just managed to do a bit more than 1.5 billion shares. Perhaps buyers felt a little more confident, but they sure didn't act on it by putting high levels of cash to work.
The tricky thing over the last few years is that almost all recoveries have started with tepid volume. If you have dismissed a bounce because of low volume, you have found yourself watching from the sidelines as the market ran higher. A big part of that was due to the Fed and its QE program, which changed in recent months, but light volume isn't always the contrary indicator that many market players think it is.
Plenty of folks want to believe that the action today was meaningful and that a bottom is forming. That is most likely the triumph of hope after a tough run more than anything else, but it is possible that we can continue to bounce. Overall, there is still no reason to declare that the market is making a major turn, but it is a pleasant respite to see a good amount of green. Yes, the light volume suggests that the move can't be trusted, but at least we have a few positives to celebrate for a change.
Have a good evening. I'll see you tomorrow.
May 19, 2014 | 1:50 PM EDT
Confidence Is Lacking
- A weak close is going to embolden the bears.
We have a little rotational action as the Nasdaq and small-cap indices outperform. Traders are doing a little bottom-fishing in the most beaten-down stocks, but volume is running very light and it is very difficult to have much confidence that this is a meaningful turn. It looks like a dead-cat bounce more than a significant bottom, but what generally happens at this point is that we have enough strength to suck in buyers before the market rolls over again. We saw that happen last Tuesday and Wednesday, and this doesn't feel very different.
The big challenge of this market is putting cash to work. Apple (AAPL) is benefiting from the need to put money to work, but there does not appear to be any real anxiety that the market is going to run away to the upside. In 2013, the moment stocks started to run a little, panic buying would set in as market players anticipated another V-shaped bounce. At this point, we seem to have lost the optimism over the potential for another quick and easy recovery.
We really need a good finish today to keep the buyers coming. A weak close is going to embolden the bears and push bulls back to the sidelines. It is decent bounce action, but it has to continue for a while in order to shore up confidence.
I'm not making any news buys right now but I will consider a few things at the close. It is still dull and painfully slow, even with more green on the screens.
May 19, 2014 | 10:11 AM EDT
Good Charts Are Tough to Find
- But I'm going to try to knock out a few quick trades.
Traders used the soft open do a little dip buying, but the issue now is whether they do some quick flipping or start to worry about putting more cash to work. Traders have had so little success with the upside lately that they are hungry to lock in fast gains, but market players haven't forgotten all those V-shaped bounces and are still hoping that we could see another one. I don't think it is going to happen so easily this time, but being left behind as the market runs up is not something that is going to be quickly forgotten after the pattern of the last few years.
Breadth moved into positive territory after a negative start and we have some money looking for safety in "value" plays like Apple (AAPL). We have a bit of a bounce in momentum names like Netflix (NFLX ), Yelp (YELP) and Michael Kors (KORS), but so many of these charts look like potential short setups rather than bottoms that it is tough to have much confidence. On the other hand, defensive names like McDonald's (MCD) are not as active, and that may be a good sign.
Finding good charts in this market is a very tough task. My two favorite small-cap charts this weekend were Maxwell Technologies (MXWL), which is my stock of the week, and Knightsbridge Tankers (VLCCF), which I mentioned last week. Finding small-caps that have held near highs the last couple of months is quite a challenge.
My trust level remains extremely low but I'm going to try to knock out a few quick trades. I still see no reason to believe that the downtrend is ending. I'll buy good price action if I see it, but my time frames are going to be very short.
At the time of publication, Rev Shark was long MXWL and VLCCF, although positions may change at any time.
May 19, 2014 | 8:23 AM EDT
Stay Cautious and Patient
- Things will shift but plan to do very little for a while.
Bad times have a scientific value. These are occasions a good learner would not miss. --Ralph Waldo Emerson
Traders were happy with a little late day strength on Friday but overall market action continues to be quite poor. There are few good charts to be found but there still isn't enough negativity to give us the sort of washout that will help to produce an aggressive bounce.
The biggest problem confronting the market right now is the two-tiered nature of the action. Momentum stocks and small-cap stocks have already undergone a severe correction but they are unable to find solid support as worries grow that the correction may now start to spread to the DJIA and S&P 500.
If the market typically had corrected all at once, there would be bottom fishing and plenty of talk about the great values that have developed. Many stocks have taken huge hits but it is being overlooked as there is worry that the correction is just going to rotate into the defensive names. Buyers are still standing aside as they fear that weakness in the senior indices will prevent money from flowing back into the stocks that have already been hit very hard.
Clearly, the market has been undergoing a rotational correction but that doesn't mean it is going to see a rotational bounce. That is the issue with this market in a nut shell. We just aren't seeing any signs of rotational buying.
I spent quite a bit of time this weekend going through the charts and came away very unimpressed. The momentum stocks that have been hit so hard the last couple months look like shorts on any bounce. Finding a good small-cap chart is nearly impossible. I see very few places to put money right now but traders are champing at the bit to be more active.
The reporting in the media adds to the challenges. The pundits want to stay focused on how the senior indices are just a few percentage points from their all-time highs. Business reporters have a tendency toward a positive bias as they don't want to scare away their audience by sounding too negative. They will almost always look for the positive spin, which is painfully obvious.
Unfortunately, the reality of the action for most market players is very different than what is happening to the DJIA. I suspect there is great frustration as actual results are so much poorer than the indices that the folks on television are so gleeful about. The reaction is to stand aside rather than be burned in a market that is sending such a mixed message.
The bottom line right now is that individual stock charts look very poor and we aren't quite negative enough to produce a washout that will give us a good bounce. There is nothing much to do but respect the fact that we are in a downtrend and not much, if anything, is working to the upside.
Stay cautious and patient and things will shift. But be prepared to do very little for a while.