In the last 20 years we have seldom, if ever, had market action as volatile as what we experienced today. Even in the wild days of the Internet bubble in 2000 and at the depths of the Great Recession in 2009, we did not have swings like we saw today.
There was downright panic at the open, but the biggest complaint among traders was the lack of fills. With the DJIA down over a thousand points, we had some dramatic selloffs in individual stocks but it was extremely difficult to catch anything near the lows.
The market bounced immediately and had the bulls breathing a sigh of relief, but nervousness developed again as the day wound down and ended up closing in the lower portion of the intraday range. While the bulls were happy to see the intraday bounce there was little positive conviction. Market players are still extremely worried about what may develop overseas tonight.
The big issue now is whether the dramatic action today is a signal of a major change in market character. The bulls want to believe we are just working off froth and that things will settle down quickly as the market regains its footing. While that is possible, this sort of shift in action usually has repercussions that last for a while.
Something major has changed and that was confirmed by the action today. The market is technically oversold but as we saw from the intraday action, that doesn't mean a bounce id going to hold. The potential for further downside is high and the entry points for longs are extremely difficult. There are folks willing to roll the dice, but there isn't a good edge for prudent trading.
Stick with being defensive while you troll for developing opportunities. It is a mess and it is more important to preserve capital than to add positions.
Have a great evening. I'll see you tomorrow.
Aug. 24, 2015 | 2:24 PM EDT
Negatives Will Be Harder to Shrug Off This Time
- Is recent volatility the start of a period of market instability?
After the substantial bounce this morning the market is starting to roll over again, which brings up the bigger issue we are dealing with today. That issue is whether the recent volatility is the start of a period of instability for the market like we had in 2000 and 2008.
I'm not suggesting we will have corrective action to the degree that we had in those periods, but all the pullbacks since 2011 have been extremely short-lived. The market has regained its composure within days and the negatives were quickly forgotten.
This time we are dealing with some macro matters that aren't as easily overcome. China is going to be an ongoing problem and the Fed has done the market a disservice with its dithering over interest rates. It isn't nearly as easy for market players to shrug off the negatives this time.
Let's see how we close but even if we do hold in this area we are still dealing with some severe distribution. There is some relief because it was looking like an unmitigated disaster early on but there are still plenty of problems that will keep some money on the sidelines.
Aug. 24, 2015 | 12:32 PM EDT
The Big Bounce
- The mood has shifted from fear of losses to fear of being left out.
The panic open has given way to a massive bounce. The mood has shifted from fear of losses to fear of being left out. We still have lots of red on the screens with breadth running 900 gainers to 5,100 losers, but we are so far off the early lows that the bulls are ready to proclaim victory if the market can stay around these levels.
This sort of action causes stocks mainly to move in tandem. Stock picking is secondary right now as everything is moving together. But as emotions cool off and shifts to back to stock picking, that is when things become very interesting for traders looking for opportunities.
This morning there was major opportunity for traders that played the emotion. My Stock of the Week, Google (GOOGL), was a particularly good example. It was possible to buy the panic below $600. The stock jumped up $40 from that level. It is not easy to make buys like that but making buys and ready to add as things develop.
Is the worst over? Was this just a big washout that will drain the market of its demons and pave the way for a V-shaped move? Perhaps, but we still have major macro hurdles as the Chinese government desperately tries to manipulate its market higher and the Fed continues its annoying debate over when it will be appropriate to raise rates.
The dip buyers have had a great day but the big picture has undergone a dramatic change the last couple of days, and there are still major obstacles. Even if we do hold the morning lows, the prospects for high levels of volatility are high.
It is hard not to flip early buys but you can see that the fear of missing bargains is driving buyers. It is what has caused V-shaped action in the past. With the change in market conditions recently it would be stunning if we see another quick and easy recovery.
Aug. 24, 2015 | 10:12 AM EDT
Mr. Market's Wild Ride
- To say it's a sea of red is an understatement.
This morning's action is the wildest since the crash of 2008-09. Traders jumped on some of the panic and produced a bit of a gap but they are flipping fast and the market is rolling back over. In a market like this, the buyers have a time frame of minutes. Longer-term investors are standing aside or buying very small.
The market is moving so fast that a lot of data are corrupt. I'm showing only a 166 advancing stocks to more than 5,000 decliners, and new lows are staggering. To say it's a sea of red is an understatement.
It isn't particularly helpful to dwell on how bad the action is. It is certainly extreme and the issue now is whether we the early lows hold and turn back up. There are signs of dip buying but the issue is whether the bounces will be flipped to death.
My game plan here is to focus on big-cap names like Google (GOOGL), bluebird bio (BLUE) and Facebook (FB) for bounces. I have small positions in each and will look to average in further as things develop. A number of small caps are of interest, but the buying support is much less certain and I'll give them more time before I try to bottom-fish.
I'm a buyer, but a very slow-moving one. The longer we can hold the early lows the more the buyers will start to inch back in.
Aug. 24, 2015 | 7:17 AM EDT
Don't Get Caught Up in Emotions
- You need to preserve capital but also look for opportunities.
"You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before."
Over the last few years, it has often seemed that panic was a thing of the past. Weak action was celebrated as an opportunity to rush in and buy the dip. Dip buying was reflexive, and bulls were so confident that it wouldn't last that they made it self-fulfilling.
Those confident bulls, who were rushing to buy the ugly action on Friday, are panicky this morning. Markets around the world suffered huge losses. Most notable was the Shanghai market that gave up another 8.45% as it became clear that governmental intervention wasn't going to provide much support. Stocks in China were up 60% back in June but are now in negative territory for the year.
If China can give back a 60% gain in less than three months, isn't it possible it could occur elsewhere? China has some unique circumstances, but it isn't the only market that has been highly manipulated by central bankers and fiscal policy. Bulls have often thought that, as long as interest rates remain close to zero, the market couldn't correct much. China shows that isn't the case.
Regardless of the reasons for this bloodbath the more important issue this morning is how we deal with it. Just like on Friday, you can bet that there is going to be some interest in buying this panic. On Friday, we managed a brief bounce in the first 30 minutes of trading then we rolled over and struggled all day. Every attempt to reverse was greeted by a wave of selling and ended up closing at the lows.
Should we be looking for a quick bounce after this ugly open? There are always folks trying to call bottoms and tops. The bottom calls tend to be much more aggressive. There is always great anxiety about anticipating a turn after we take a huge hit and there will be plenty of folks lined up to play one this morning.
One thing that may help a bounce develop is some dovish comments from a Fed member. We've had some ridiculously unhelpful comments about conditions being ready for a hike that have made this situation even worse. It is likely that there will be some attempt to soothe markets, even though the Fed likes to pretend that they don't focus on movement in stocks.
The most important thing to keep in mind is that, while conditions are ripe for some sort of bounce, there is no reason to believe that we have seen a bottom. Markets down as intensely as this one will almost always have some sort of rebound, but this action has trapped many folks that would like to escape. Their confidence has been shaken, they have racked up some big losses and they would like to move into cash if they can do so with less damage.
We've grown used to the V-shaped, straight up recovery the last few years, but this selling is different than what we've typically seen. There is a real shift in emotions, and we no longer have the Fed propping us up like it has for much of the past.
Many folks are stunned by the turn this market has taken but the truth is that there have been underlying issues for months. I've discussed many times how the average stock has been in a bear market for a while. The broad market is now catching up with what has been developing for a while.
The good news is that many stocks have already undergone substantial corrections and now the indices are finishing up the job. I don't try to predict market bottoms and tops. Above all else, I respect momentum, and right now there is no question which way that is running.
The key here is to not get caught up in the emotions and to not be overly anxious to declare that the worst is over. The biggest bounces occur during downtrends so there will be trading opportunities, but don't trust them to last.
As long as you respect the fact that the market has suffered a breakdown, you can focus on some quick trades and protect capital. Capital preservation is always the most important thing, but this sort of action creates some great opportunity.