"There is virtue in work and there is virtue in rest. Use both and overlook neither."
-- Alan Cohen
Many market players were expecting a dull week as they waited for Janet Yellen's highly-anticipated speech at Jackson Hole on Friday. Although the indices have been trading in a very narrow range for weeks, the underlying action had a positive tone. That shifted the last two days.
After weeks of good stock picking, a number of pockets of strong momentum and speculative action in a variety of small cap names things turned ugly. We had a warning on Tuesday when several of the super-momentum names, that had been leading the market, reversed hard. Acacia (ACIA) , Yirendai (YRD) and Twilio (TWLO) went from green to red, and the dip buyers were in no rush to buy the weakness.
It isn't surprising that some of the extended stocks pull back and take a rest, but the big problem was that the selling quickly expanded to other groups. Many of the secondary names that have been doing well sagged too.
An additional negative catalyst was comments by Hillary Clinton about the unfairness of a price increase by Mylan (MYL) . This hit the entire biotechnology sector quite hard. Biotechnology has been one of the better speculative groups for a while, but just about everything in the group was hit.
One of the technical negatives that developed yesterday was that the selling was on high volume which produced what is known as a "distribution day". We've had enough of these days lately to cause Investors Business Daily to change its market outlook to "uptrend under pressure" from "confirmed uptrend".
To put it simply, we need to a bit more cautious now that the price action has shifted and is not as positive. Playing some defense in order to protect recent gains is the obvious course of action, but this market has a tendency to frustrate those that become too negative too quickly. Strong defense often carries a cost when we reverse quickly.
The other challenge for the bears is that the market has a tendency to bounce back when it sells off in front of important Fed announcements. Janet Yellen and her cohorts always seem to find a way to reassure the market when it starts to worry about interest rate hikes. As I've written many times, the market loves to love the Fed and it always seems to find something positive to focus on.
The bears have been growing louder lately, as they see a more hawkish Fed as being a selling catalyst. That coincided with the seasonal weakness of August and September, so it is no surprise the predictions of doom and gloom are building. One of these days they will be right, and a day like yesterday makes them very hopeful.
While the action of the last two days was quite poor it isn't bad enough to proclaim that the trend has shifted. We are seeing fairly routine corrective action after some great action in individual stocks. The indices have done a very poor job of telling us what has been going on in this market recently, but the price action in individual stocks has been quite clear. The uptrend is now facing some obstacles and we'll have to see how it reacts to Janet Yellen tomorrow.
There is little choice to play some defense and protect gains, but the good news is that we should see some better entry points in favorite names. We were a bit overheated and now we are resetting.
Early indications are soft, but don't be surprised to see our old friends, the dip buyers, give it a go early in the day.