Last Friday, market players were nervous about carrying much inventory into the long weekend. The worry was that China would be weak again and they'd be caught in a gap-down open on Tuesday morning.
China was weak again, but this time it didn't matter. We gapped up anyway and after some stumbling around we had some steady buying into the close. The poor positioning of many folks helped the bullish cause, and when the opening gap didn't completely fizzle the buyers continued to inch in.
It was another big day of gains, but we have had some giant moves recently and a move of almost 400 points in the DJIA doesn't even take us out of the recent trading range. We still have some overhead resistance to deal with, but we are in position to deal with the highs we hit back on Aug. 28-29.
While the screens were an endless sea of green today, that didn't help to create many setups. Stocks simply have been too volatile recently to produce bases or foundations. They are moving erratically, but that doesn't mean they can't be up quite a bit.
At this juncture, the bulls will be talking about V-shaped bounces again. They have been disappointed the last two times we had similar action, but the key to the V is that market players start to worry about being left behind. Underinvested bulls struggling to put money to work have been the primary driving force behind prior recoveries. They were popping up today, and if there isn't any overseas news to worry the market, they are going to be looking for entries tomorrow.
Technically, we aren't out of the woods, but it was a win for the bulls and they are on the cusp of taking out some important overhead resistance. That doesn't make new entries easy, but that is the way we have to lean as we watch for further developments tomorrow.
Have a good evening. I'll see you tomorrow.
Sept. 8, 2015 | 2:02 PM EDT
Stocks Show Strength, But I'm Cautious
The firm opening holds, but I don't see many deals that I like.
The opening gap this morning produced a little selling, but we didn't dip too much. That's helped to shore up confidence -- and the longer we hold steady now, the braver the buyers become. Fear of the quick reversal is ebbing and hopes of a strong close are growing.
But one thing to keep in mind as you contemplate this is that we had similar bounces twice previously in the last couple of weeks, leaving market players convinced that the worst was over. But in both cases, the bounces failed badly and overly aggressive bulls got trapped.
A third failed bounce that takes out Friday's lows would really put the fear of the bear in some folks. But at the moment, the attitude is optimistic and upbeat and that will help to hold us up into the close.
Some other positive developments today are that we have a higher level of new highs, some better action in speculative small caps and leadership from biotechnology, chips and retail. These are all better signs of support rather than just reflexive bounces.
Still, I've been doing very little so far today. I'm not bearish, but there still aren't many good technical setups and I don't have enough inventory to do much selling into strength.
I'll be looking at the close for some buys, but although the action has improved, I don't see much of an opportunity to put cash to work yet.
Sept. 8, 2015 | 10:30 AM EDT
Happy and Green, But Unconvincing
- Market action is not strong enough to convey the message that the worst is over.
The bulls were acting fat and sassy this morning but they need some "gap and run" action to be convincing. While there's a sea of green and good breadth, we aren't building on the early strength so far. In fact, 30 minutes into trading we are at the lows of the day and falling into the gap. That is not the way to attract more buyers.
One of the biggest changes in market character over the last few weeks is that there has been a greater tendency to sell into strength. For a very long time this market frustrated traders that sold into gap. They were forced to reload when we didn't fade and that was what helped to produce the V-shaped moves. Over the last few weeks, however, worries that the market would run away to the upside have almost disappeared.
If the market can stay green for a while that will eventually attract some buyers. So far, though, there isn't much chasing at all. Biotechnology and big-cap momentum names are leading, which is understandable, but it simply is not strong enough action to convey the message that the worst is over.
Almost every stock I own is in positive territory this morning but so far I'm seeing nothing that I feel compelled to add. I've made a couple minor sales and would like to buy more of names such as bluebird bio (BLUE), Facebook (FB) and Google (GOOGL) but I see no reason to be building positions this morning despite the happy mood.
Sept. 08, 2015 | 7:32 AM EDT
The Dow Is Up, Emotions Are Running High
- Use the strength to reposition, stay selective and manage your trades.
'I'm selfish, impatient, and a little insecure. I make mistakes, I'm out of control, and at times hard to handle. But if you can't handle me at my worst, then you sure as hell don't deserve me at my best.'
The biggest upside moves always occur in the worst markets. Emotions are stronger when the action is poor and market players are less prepared for sudden upside. If you have handled the downside well, you probably aren't well prepared for a sudden move back up. When such a move does occur, there is a huge sigh of relief -- and a strong desire to believe that the worst is over and the market is going to run straight back up. It usually isn't that simple, or easy.
The inclination to believe that the tide has turned and that it is clear sailing to the upside is particularly strong in the current market because of the frequency of V-shaped moves in the last few years. Despite the fact that V-shaped moves are a technical exception, they have become standard behavior. A big move, like we have this morning, is celebrated as the start of another one.
Despite the celebration of various folks who claim that they saw the bounce coming, we are only back to where we were last Thursday. We have had some very big swings over the past couple of weeks, and it is extremely important to maintain perspective. A 300-point bounce in the DJIA is just normal volatility lately, and doesn't do anything to change the overall technical picture. We still have a broken market that is struggling to find a lasting low.
Bounces in broken markets always cause great celebration. Those folks that have been trying to call a bottom are quick to claim victory, and those that have been struggling to navigate the action are relieved and hopeful that the worst is over. The mindset shifts -- which is why failed bounces make bear markets so painful. The lure of hope is strong, and when it fails to pan out, it causes the gloom and despair the undermine confidence in stocks.
So how do we deal with a big gap up, like we are seeing this morning? First, it is important to keep in mind that these big gap ups have not been good chase opportunities, recently. We have not gained much upside following these openings. About a month ago, there was a stronger tendency to chase gaps. But now there are more trapped bulls and confident bears, and they are using strength to reposition, rather than to panic buy.
The big question when we gap up like this is whether the worst is over. Maybe it is, but it really doesn't do much good spending time dwelling on the issue. What we need to do is watch the action in individual stocks to see if they are setting up.
If you have been a prudent trader, patiently waiting for better technical action, then you should have a very high level of cash. If the market holds, and starts finding support, then you slowly start to redeploy your capital. The idea isn't to be fully invested the moment the market hits a low. The idea is to start buying stocks when they have the best chance for sustained upside.
Despite all the shouting this morning about fantastic timing, it isn't necessary to even consider whether we have seen the lows or not. Stocks will tell us the story. If you have a watch list, it is time to put it to use and make some incremental moves. The key is to make sure you manage any new buys and are ready just in case the bounce fails.
It feels very emotional out there, this morning, and we'll see how it develops. If you are sitting on a high level of cash, you are in great shape to profit if the market really has made a low. Don't be in too big a rush to throw capital at this market. Stay selective, move incrementally and manage your trades. If this really is the turn, there will be plenty of time to make some money.