A couple of days of decent gains had market players feeling better yesterday, but momentum fizzled out and we fell back into a trading range. Weak markets in China received most of the blame for the dismal action, but seasonality and thin trading contributed to the lethargy as well. It wasn't a rout, but breadth was 2-to-1 negative and plenty of stocks gave up recent gains and dripped lower.
In a trading range, pre-existing bias tends to be reinforced. The bulls can find reasons to be optimistic, such as the fact that we are holding support levels, while the bears can justify their pessimism by pointing out that there isn't much leadership.
I'm leaning a bit more to the bearish side of things as there is just too much poor action in individual stocks. The pounding of the semiconductors is of concern and biotechnology can't seem to regain its luster. We are finding support where we need to, but the pockets of momentum are extremely narrow and the underlying action is weaker than you'd think if you just look at the indices.
A big contingent of market players is on vacation in front of Labor Day and that is contributing to the thin and choppy trading. If you aren't highly selective and managing things closely, you will have difficulty.
It was a poor day but not bad enough to end the trading range action. Keep on plugging away.
Have a good evening. I'll see you tomorrow.
Aug. 18, 2015 | 12:48 PM EDT
Circling the Wagons on the Trading Range
- · Market players take gains, protect capital amid slow action.
We have some slow, drippy action out there with breadth running close to 2-to-1 negative. The selling is not aggressive but it is typical trading-range action after a couple of strong days. Market players are taking gains and protecting capital after a bit of a bounce. That is what a trading range is all about.
The worry is that the selling could pick up and that we will retest some recent support, but the tendency lately has been toward stronger closes. Unfortunately, the uncertainty of China may prevent some buyers from doing much overnight.
What this market really needs is some leadership. We do have Home Depot (HD) and Facebook (FB) acting well, but there isn't much in the way of themes right now. Our best sectors are all off their recent highs and the worst sectors, especially oil, still can't find support. (Facebook is part of TheStreet's Action Alerts PLUS portfolio.)
Good markets have strong, obvious leaders and we don't have many right now. On the other hand, the bears are still incapable of taking advantage of the edge when they have one. There are plenty of individual stocks stumbling around and trading down, but there are no signs of any great anxiety.
I'll be looking for some late buys, but at the moment I'm not expecting to find much. I may add to my FB position on a good close.
Aug. 18, 2015 | 10:13 AM EDT
It's a Trading Range Market, and That Says It All
- ·Focus on knocking out a few good trades and don't waste much time on the macro arguments.
The biggest change in the market recently has been the very inconsistent follow through after some good action. Part of that is due to the negative news flow out of China, but there is also a general decline in the willingness to chase. We've been trapped in a trading range for months and it simply hasn't been very beneficial to chase strength. Traders have learned that and are now more inclined to sell into strength rather than chase it.
We have a negative bias this morning with breadth running about 1,625 gainers to 3,350 losers. Home builders and retailers are showing slight strength, while metals, commodities, chips and solar energy are under pressure. The momentum screens are mixed with nothing really standing out at the moment.
All we really need to know right now is that it's a trading range market. Some stuff is working and some stuff isn't. I started a position in Builders FirstSource (BLDR) as a Home Depot (HD) sympathy play and I have Elelixis (EXEL) and BioTelemetry (BEAT) on my radar as they are in position to test overhead resistance. Mobileye (MBLY), my stock of the week, is digesting a good gain from yesterday and seems to have some good support from the hot money traders.
It is vacation season, volume is light and the action is choppy. Focus on knocking out a few good trades and don't waste too much time on the macro arguments.
Aug. 18, 2015 | 7:05 AM EDT
The Bulls Have to Work Harder
- The test today is whether the market will shrug off China.
"Government control gives rise to fraud, suppression of Truth, intensification of the black market and artificial scarcity. Above all, it unmans the people and deprives them of initiative, it undoes the teaching of self-help..."
After the big reversal on Wednesday and back-to-back positive days on Friday and Monday, the mood of market players has improved. There have been growing concerns that a long-awaited major correction was upon us, but the indices found good support where they needed to, and there have been some pockets of good action in many individual stocks.
So are we back on track and ready to head for new highs in V-ish fashion? That has been the pattern for a very long time, but we are still in the middle of a trading range, we have negative seasonality and macro issues keep popping up to hinder further upside.
The major issue this morning is China once again. The Shanghai Composite was down over 6% as investors had renewed doubts about how effectively governmental agencies could prop up the market. The China Securities Finance Corporation said it would no longer conduct daily interventions into the market, and that seems to be the main catalyst for the selloff.
The weakness in China caused European markets to slip and is causing some early pressure in the U.S. So far it's minor pressure, but it undercuts recent momentum and is going to require some effort by the bulls to overcome.
The good news is that the market has done a nice job of shrugging off the China issues recently. We came back after the Chinese markets crashed initially and we had a massive reversal on the currency devaluation last week. China is obviously hurting oil, commodities and other areas of the market, but given the magnitude of the issues, the U.S. markets are handling things rather well.
While the indices have done a nice job of finding support and even have regained some key technical levels, they still aren't developing the sort of momentum that the bulls have celebrated for so long. We have trading range action, which isn't bad as it does produce some good opportunities for traders.
The nature of the market action has shifted recently. There is more narrow leadership and less of an inclination to chase. Bulls are still quite optimistic, but the price action has been undergoing a change in character.
This shift in the market is a product of increased concern that a more hawkish Fed and a number of international macro issues are finally going to produce the correction that the bears have anticipated for so long. There have been more calls for a market top recently, and the fact that we are now in the weakest time of the year for the market doesn't help.
The market has acted fairly well the last few days, but it is trading range action and we need further proof that the bulls have some real conviction. The pressure caused by China will be a good test today. If we can shrug that off and build on the last two days, it will be hard to deny that positive sentiment is taking hold.