The good news was that the market bounced strongly off the early lows. Market players interpreted the minutes of the last Fed meeting to mean that the chances of a September hike were low, but the impressive thing was that we had a strong intraday reversal and many stocks finished well off the lows.
The bad news was that there was still plenty of red on the screens. Breadth was very poor with just 1,650 gainers to 4,200 decliners. and there were only about 70 stocks making new highs. Many small-caps failed to find support and the momentum screens looked quite bloody.
It was a good intraday bounce, but there were no signs that market players are optimistic that the worst is over. The market keeps finding support just in the nick of time, but we have been suffering a steady stream of distribution and it is getting extremely difficult to find good leadership. For a long time, chasing was the way to go, but recently it has been better to sell into strength.
While the indices are still within a trading range, it is a bear market for many individual stocks. You can paint a positive picture if you view the indices and a few individual stocks selectively. If you dig deeper, the action is quite poor in many places and the intraday swings aren't enough to fix the rot.
The bulls will be talking about the intraday bounce tonight, but overall the bears can claim victory today.
Have a good evening. I'll see you tomorrow.
Aug. 19, 2015 | 1:57 PM EDT
How Long Can This Bounce Last?
- · Bulls hope to get ammunition from Fed minutes.
The first bounce this morning failed. A second bounce try into the minutes of the last Fed meeting has taken hold and now we'll see if the minutes will give the bulls some ammunition.
There is an intense debate over the possibility of a rate hike in September, with the dovish camp pointing to China, oil and low inflation as reasons to be in no rush. The hawkish group is focused on improving employment and some other economic factors, but many in that camp want a hike to back up their arguments that the economy really isn't bad. The fact that interest rates are still near zero is pretty strong evidence that the Fed has not done a very good job at economic stimulus.
The minutes to the last FOMC meeting were accidentally released early by Bloomberg. There was a slight positive reaction initially, as there is nothing to indicate that a September hike is a certainty. Most participants wanted some further proof that conditions were met, but that was six weeks ago and we still have another month before the September meeting, so we are still pretty clueless.
There isn't much here to drive us one way or the other, but the market has had a tendency to recover from ugly action like we've seen this morning. There is a bias toward buying this news even though the news isn't particularly clear.
A good close will have the bulls feeling optimistic again, but the bouts of selling pressure are becoming more severe and there is danger that the next dip won't so quickly reverse. The buyers are stepping up now and we are at the highs of the day. Market players still aren't convinced that a September rate hike is very likely.
Aug. 19, 2015 | 10:45 AM EDT
Early Negativity Is Quickly Forgotten
- ·We need to watch for a change in character after the early bounce.
The recent pattern of action is playing out again, this morning. We start off with some real doom and gloom because of developments overseas -- such as what we are seeing in China. We stay weak, and make a couple of new lows on lousy breadth, but then 30 minutes or an hour into trading, we start to bounce and we see good support for the remainder of the day. The early negativity is quickly forgotten, and market players start looking to add long exposure.
What we need to watch for is a change in character after the early bounce. The biggest negative would occur if we see a new, intraday low after that bounce. As long as we can hold that level, the bulls will remain confident.
One thing many people don't really seem to understand is that, right now, there is a major disconnect between the indices and the action in the average stock. Over 60% of stocks are below their 200-day Simple Moving Averages, which is bear-market action. There are enough big caps holding up to keep the indices in a trading range, but below the surface it is not very pretty. Oil has been an absolute disaster, but that fits with other momentum favorites -- like biotechnology and solar energy -- that have really stung many momentum traders.
We'll see if the bulls have energy for another good intraday reversal to upside, but they have been using up a lot of buying power, lately. The reflexive buying still works, but the ability to produce sustained momentum is the issue.
I've taken a few stops this morning and sold down Builders FirstSource (BLDR), which I mentioned yesterday. I don't see much to do right now, but I have my eye on Facebook (FB) -- if it can move back into positive territory.
August 19, 2015 | 07:33 AM EDT
The Dip Buyers Will Be Out There Again
- Usually, morning weakness has been a buying opportunity.
"There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed -- inflation and real economic activity."
-- Stephen D. Williamson, St. Louis Fed vice president
Governmental intervention helped to turn Chinese markets positive overnight, but markets around the world aren't taking much comfort in the manipulation. We have plenty of red around the globe. This isn't helped by worries about some hawkishness in the FOMC minutes, which will be released at 2 p.m. ET.
After a decent two-day bounce, things turned soft again on Tuesday. It was typical trading range action, and wasn't helped by the fact that we are in the middle of vacation season and dealing with negative seasonality. Trading is slow and with earnings season now completed, we are dealing mainly with some macro headlines that aren't particularly inspiring.
China has been the main driving force, as governmental officials desperately look for a way to prop things up. The harder they try to artificially inflate markets, the less trusting many people become. While they may try to play an engineered bounce, they have little confidence that a sustained rally can be produced. There is rot under the surface, and it can't be fixed with governmental manipulation.
While China is providing the bears with some ammunition, it is the timing of interest rate hikes by the Fed that is likely to be the main market driver in the near term. The debate is whether rate hikes will come in September or December. Some feel that the chaos in China will put the Fed on hold, but the Fed seems determined to salvage its credibility with at least a small hike quite soon. That will help them establish the notion that there is some real improvement out there.
According to an official at the St. Louis Fed, quantitative easing did nothing much to boost the economy. Stephen D. Williamson wrote in a white paper that the results of QE were "at best mixed."
Regardless of the impact of QE, we now have to be concerned with the reversal of years of financial engineering and that has the market a bit worried. The bulls will tell us that we can handle higher interest rates, because there is some improvement out there, but stocks aren't all that confident that is the case.
Technically, the market is mired in a trading range. There are some bigger-cap stocks like Action Alerts PLUS charity portfolio holding Facebook (FB), Growth Seeker portfolio holding Amazon (AMZN) and Netflix (NFLX) that are acting well, but the average stock has been in a bear market for a while and paints a very different picture than the indices.
We are set up for a weak start this morning, but the market has consistently battled back from this sort of start. You can be sure the dip buyers will be out there again. Early weakness has been a buy signal, especially when it feels as gloomy as it does this morning.