The good news is that the indices bounced back from the brink of a technical breakdown. The bad news is that they failed to gain much traction. Not only was there limited momentum, but the number of stocks making new 12-month lows hit the highest level since March 10. There are some stocks with strong action like Netflix (NFLX), Eli Lilly (LLY) and Ambarella (AMBA), but only about a third of stocks in this market are trading over their 50-day simple moving average of price.
The consistent support is keeping the bulls positive, but there are plenty of complaints about how difficult it is to make progress. There are some limited opportunities, but the reversals are making things very dangerous for the trend followers.
The current market action may not look very significant one way or the other, but it presents some major trading challenges. Not only is it very slow, but there is plenty of randomness and we are stuck in a trading range. The average stock is not acting well, but there are still some fliers that are catching momentum. It is a very odd mix of action, especially if you are trying to figure out if this is topping action or just churning within a base.
The easy thing to do right now is to declare that a top is forming and we are close to a breakdown. That may be the case, but until there is further confirmation it isn't a safe bet to make.
Have a good evening. I'll see you tomorrow.
June 9, 2015 | 2:25 PM EDT
Dip Buying Could Spur Ugly Repercussions
- · The short-terms aren't worrying about that right now.
One of the hallmarks of this market is that when it looks as if it is on the brink of disaster it is a good time to buy. We had a great example this morning as the selling accelerated following the open and the momentum screens were about 90% red.
That was the signal for the dip buyers to go to work and they did a nice job. Once again they haven't been able to generate substantial momentum. but they have the indices slightly into positive territory and breadth has improved to about 2,450 advancers to 3,200 decliners.
The challenge of this sort of action is that after the bounce there just isn't much more happening. The short-terms flip their buys, lock in their gains and wait for the next opportunity to buy a pullback. It has worked so consistently for so long that is reflexive. At some point, that will likely to produce some ugly repercussions, but they aren't worrying about that now.
Vasco (VDSI), which I mentioned the other day, continues to act well and I'm trading a few other odds and ends likeOne Horizon Group (OHGI), Aspen Technology (AZPN), Second Sight Medical Products (EYES)andOncothyreon Inc. (ONTY).
We started to weaken a bit as I write and it will be interesting to see if the dip buyers stick around long enough to keep us from re-testing the morning lows. If they don't, you can bet they will be back tomorrow for another try.
June 9, 2015 | 6:58 AM EDT
Looking for an Intraday Bounce
- But I don't expect the bulls to produce much sustained momentum.
The S&P 500 is trading down for a fourth straight day and that has some folks looking for an oversold bounce, but a breakdown in the iShares 20+ Year Treasury Bond ETF (TLT) and pressure on bonds is creating a substantial headwind. The market has been lackluster for a while and that's continuing today as breadth is running about 1,800 gainers to 3,250 decliners, and the pockets of momentum narrow even further.
The saving grace of this market recently has been good action in individual stocks like Ambarella (AMBA) and Netflix (NFLX), but the number of stocks offering a safe haven is contracting and the momentum chasers are finding themselves quite in reversals quite often.
Although many market players don't like to hear it, probably the healthiest sign for this market is cracking underlying support with vigor and give cause concern. We have been in this state of limbo recently, which isn't providing the conditions we need for good upside. It would be better to shake out the hesitant bulls and find some new support to provide a foundation for a better run.
I have nothing much going on as far as trading, just a few odds and ends, and I was stopped out of a few things as well. There just isn't much other than a few intraday trades if you have a time frame that short.
I'm watching for an intraday bounce in the indices to relieve some oversold pressure, but I don't expect the bulls to produce much sustained momentum. Sellers are likely to look for exits on strength and keep the upside contained.
June 9, 2015 | 6:58 AM EDT
It's Narrow and Choppy Out There
- The risk to the downside is building up.
"If a situation is such that you can do something about it, then there is no need to worry. If it's not fixable, then there is no help in worrying. There is no benefit in worrying whatsoever."
-- Dalai Lama XIV
I often warn about the dangers of being overly anticipatory. In their zeal to make big calls and predict exact turning points, market players will often find themselves prematurely on the wrong side of the market. Trying to predict market tops has been particularly dangerous the last few years.
While trying to predict market turns can be counterproductive, that doesn't mean that we should ignore negatives and obvious warning signs. Even when the market is in an uptrend, there can still be good reasons to increase our caution and temper our bullishness.
The current market offers a good example of the balancing act that is required when we are in a trading range and still have positives, but also a growing number of negatives. The market hasn't yet done enough to undermine the positive trend that has been in place for a while, but it is struggling, and the potential for a break in support and a change in trend is growing.
Although the indices have been mixed lately, the bulls are generally content with the market because there have been enough individual stocks acting well to keep them occupied. It is narrow, and upside momentum is limited, but there are some stocks that continue to act relatively well.
Given how this market has so often shrugged off bouts of weakness, it isn't too surprising that there are some confident bulls that don't believe that we are on the eve of destruction.
If you want to worry about this market, you really don't have to look any further than the chart of the S&P500. It has cracked support at the 50-day simple moving average and is looking to test support at the lows of May. Yesterday, it had its lowest close since April 7 and hasn't made any notable progress for months.
Quite often in the last few years, we have had the S&P 500 and DJ-30 cover up weak action under the surface. Recently, we have had the reverse situation, where the indices are hiding some stronger action in certain stocks.
However, that is also deceptive because it is narrow. If you look at an indicator compiled by TCNet only about 34% of stocks are trading over their 40-day moving average, and the level of stocks at new highs is suppressed. That isn't exactly a roaring bull market.
Ultimately, it is the action in individual stocks that should be our main guide to how we deal with the market. If you have stocks that are working, then stick with them and don't let the big-picture worries spook you out of a good trade.
However, even the most ardent bull will have to recognize the fact that it is narrow and choppy out there and that upside momentum is limited. That doesn't mean that you need to be negative, but it does suggest that you need to stay very vigilant and be ready to take some defensive steps if conditions continue to deteriorate.
I'd really prefer to be more excited about this market, which is still close to all-time highs and hasn't done anything really wrong. The problem is that the upside action is just too anemic and too limited. There are trades to be had, but the risk to the downside is building and we can't be blind to that.