The indices are supposed to be a quick and easy way to summarize what is going on in the market. Most of the time they do a pretty good job of telling us the direction in which the average stock is moving but there are times when they are misleading. Today was one of those days.
Breadth was better than 2 to 1 negative and momentum stocks like Tesla (TSLA), LinkedIn (LNKD) and Mobileye (MBLY) were crushed. The DJIA, however, was up 43 points and looked quite perky. The DJIA is the worst of the major indices when it comes to painting an accurate picture but the S&P 500 managed to stay even while the Nasdaq and small cap indices lost over 1%. I suspect that momentum indices like the IBD50 probably lost more than 2%, given the intensity of selling in the high flyers.
It was just plain ugly under the surface, but what is most worrisome is that there are so many market players who are ready to shrug it off as just a one-day aberration. The main bullish spin today was that it was just some selling to raise money for the Alibaba IPO later this week. That sounds like a good excuse but the selling went far beyond what would be necessary to raise funds -- especially since there is supposed to be so much cheap capital still on the sidelines.
We will probably see some headlines blaming the underlying selling on worries about the Fed meeting on Wednesday. That makes more sense, but we have to wonder if this time the nature of the market is really shifting. We typically have shrugged off these selling flurries on Fed concerns very fast, but the degree to which momentum names sold off today was troubling.
When this sort of action occurs you can either take some defensive action and play it safe or hold tight and hope that the selling won't gain momentum. The optimists have done well, but you can suffer some real damage if you don't cut things quickly enough.
This market has had several 'stealth' sell-offs this year and in each case they played out longer than what we've had so far this time. I'm concerned that the selling isn't over yet.
Have a good evening. I'll see you tomorrow.
Sept. 15, 2014 | 12:45 PM EDT
Err on the Side of Defense
- There's little choice but to take stops and protect capital.
We have had very ugly corrections in momentum and small-cap stocks twice this year while the DJIA and S&P 500 barely moved. We are seeing that exact action again today. If you simply looked at the DJIA, you would you think it is just a slow day. But there is carnage under the surface. Tesla (TSLA), for example, is down more than 7%, and out of a hundred or so high-momentum names, only four or five are green.
Similar action is taking place in speculative small-caps. The bids have disappeared and there is no interest in trying to buy the dip so far. This sort of action can really add up to a poor day if you are heavily long.
What is tricky about this sort of market action is the many times it has suddenly bounced back just when it appeared on the verge of major downside. If you took defensive action and raised a high level of cash, you feel foolish when the market bounces back and as the perma-bulls point out that they were right once again.
In the days before the Great Recession, active traders would produce exceptional outperformance by taking aggressive defensive action when the market started to weaken. We would actually have sustained downside momentum at times that eventually created great opportunities. In the last few years if you stayed bearish longer than a day or two, you quickly found yourself on the wrong side of the action when it came roaring back.
The bulls are excusing this action as just some selling to raise funds for the Alibaba Group IPO. It feels like more than that, but that is the bullish spin. The bears argue that this time interest rates and worries about a more hawkish Fed are causing the pressure, and that change in character may persist.
It is ugly action regardless of the reason, and there is little choice but to take stops and protect capital. It could easily bounce back like so many other times, but betting on that carries a very high level of risk. It is better to err on the side of defense right now.
Sept. 15, 2014 | 10:21 AM EDT
This Actions Feels Different
- But I'm not going to rush to fight it.
You wouldn't know it by looking at the DJIA, but this market is being hit hard this morning. Small-caps and momentum stocks are bidless, and breadth in those groups is horrendous. Tesla (TSLA), which helped to lead the market up, is now leading it down. Apple (AAPL) is still in positive territory almost all leading stocks are in negative territory. Breadth on Nasdaq is 4 to 1 negative, which gives an indication of how broad the selling is.
Last week we saw early pressure a few times, but the dip buyers showed up and the mood was quite upbeat by the time the close rolled around. On Friday we didn't see much of a bounce, and today there are no signs of dip buying support so far.
The big difference this morning is that we aren't seeing any interest in bottom-fishing. That is a major change in character. What we have to watch for is how quickly the sellers hit the bids when there is a bounce. Market downtrends are a function of failed bounces and that is what we need to monitor.
I discussed last week that I had increased my cash levels substantially. I took a few more stops this morning and I'm in position for new buys, but I'm not rushing to deploy capital. This action has a different feel to it and I'm not going to rush to fight it.
Sept. 15, 2014 | 8:31 AM EDT
Stay in Protection Mode
- But avoid getting too bearish, too quickly.
Remember that life's big changes rarely give advance warning. --H. Jackson Brown, Jr
The major market indices have made little progress for over two weeks now, but overall they have held up fairly well from a technical perspective. On Friday the selling picked up, and we saw a technical distribution day, but the uptrend that started in early August is still intact.
Over the last few years, the market has typically bounced back very quickly from this sort of lethargy. Just when it starts to look as if technical damage will change the character of the market action, the indices will find their footing and run back up in a straight line.
The bears are hoping that this time it is different and, once again, they are counting on the Federal Reserve to be the catalyst. For years now, the bears have been anticipating that higher interest rates on U.S. Treasuries would be the catalyst that would produce a major market top. It certainly is a logical argument. The old adage, "Don't fight the Fed," has worked extremely well for a very long time. Given the hawkishness that's starting to emerge now, why shouldn't work in the other direction as well?
The bears' big problem is that, even if rates do start to go up, they will still be so low that it won't have much real impact. The issue is one of perception. Market players know that, at some point, the Fed is going to be a drag on the market -- but it's impossible to time when that will occur.
Perhaps it will be different this time. But anticipating a "sell the news" reaction to the Federal Open Market Committee announcement has been a losing trade for years. This time, there seems to be a higher level of concern that the tone is becoming more hawkish. It is very likely the phrase about rates staying low for an "extended period of time" will change, and that is likely to cause some issues.
Another somewhat worrisome development is the huge upcoming Alibaba (BABA) initial public offering. There is news this morning that demand is so strong that the price and size of the offering is being increased -- but the IPO market has been overheated for a while, and it seems almost too obvious that a giant, massively anticipated offering is the sort of event that would come near a market top.
So there are a number of worrisome developments out there. Still, though, the single biggest positive is that it has been a good market for stock picking. If you are sticking with the key stocks that are acting well, the market looks quite fruitful. Correlation among stocks hasn't been high, so good stock picking has been rewarded, while the market timers have had little success in either direction lately.
My main advice for a while now has been to stay focused on the action in individual stocks, and to avoid attempting to anticipate a market turn. When the momentum and speculative names start to struggle, that will be the time to become more bearish. Granted, there were some signs of that on Friday, and we do need to tighten up stops and watch for more evidence that distribution is increasing. But on Wednesday and Thursday, those stocks bounced back very strongly. Overall, we don't want become overly bearish too quickly.
We market players are in one of the toughest times of the year, seasonally, and there are plenty of negative catalysts out there. The bulls tend to shrug off concerns like that, and we could easily shrug it off again. But there is indeed some poor price action that warrants our concern -- and the key to the trading game is to protect capital. Do keep that that firmly in mind.