A bounce in the last hour of trading took the indices off the lows of the day, but that did nothing to change the fact that it was a very ugly day. Breadth was poor, the point loss was bad and there were no signs of underlying support.
When the market is acting this way, you need not be a genius to know that it is best to just stay out of the way. Our No. 1 goal should always be to protect our precious capital, yet there is always some pundit in the media urging us to hurry up and jump in.
There simply is no reason right now to believe the market has made a short-term low. In fact, the selling momentum today suggests more downside lies ahead. The smart bet is to do what will keep you safe rather than to roll the dice and hope the market suffers from amnesia overnight.
The good news is that the harder we sell off, the better the potential opportunities down the road. It is just a matter of being patient and protecting capital until the conditions change. There will be plenty of warning that a positive change is occurring and you'll be able to put money to work quite easily. Don't listen to the folks who will make it sound like, if you don't buy into the teeth of a decline, you'll never have another chance. In a better market, there will be many new opportunities, so don't force it now.
Have a good evening. I'll see you tomorrow.
Sept. 22, 2015 | 1:19 PM EDT
You Call This a Buying Opportunity?
- · Just stand aside and let this ugly action play out.
The indices are hovering near the lows of the day with big losses, breadth is better than 4-to-1 negative, the momentum screens are 90% red and the mood is very dark. Of course, this is the perfect setup for Wall Street "experts" to declare a "buying opportunity."
The pros on Wall Street always want us to rush in and buy when things are bad. They are always early to say it is time to buy because they think buying the exact low is more important than anything else. Wall Street never wants you to stay in cash for long because when you have cash you may not need their services.
The key to dealing with ugly action like we have right now is to simply stand aside and let it play out. Forget trying to time the exact moment that we hit bottom. Just stay patient and let it play out. Eventually, good opportunities will develop. You don't need to time the exact lows. You just need to wait until the price action shifts and the mood improves.
Timing is extremely important, but you have to think about it a bit differently than many people do. The key to making money isn't to time exact tops and bottoms. There are thousands of people trying to do that every day and those who do it with precision tend to confuse luck with skill.
The timing that is far more important is the sort that allows you to catch sustained momentum. The secret to making big money is to catch trends that persist for at least a little while. Those trends don't typically occur immediately after a turn. It takes a while for the conditions to develop and emotions to build.
We have downside momentum building right now, and if you respect that fact, there is little reason to worry. Just let it play out and you can be confident that sooner or later the conditions for some upward momentum will develop also. Focus on catching trends and not turns and you will do well.
Sept. 22, 2015 | 10:30 AM EDT
Early Bounce Doesn't Get Much Traction
- · Bulls reluctant to pounce on weakness.
Over the last couple of years, gap-down opens have generated almost automatic buying. In fact, the bulls would hope for some early weakness they could jump on. Since mid-August, that dynamic has shifted. There actually is some hesitation now, and the early bounces have not held up that well.
So far this morning, we have held the initial lows, but the bounce has not gained much traction. Breadth is off the early lows but is abysmal at around 1100 gainers to 4250 losers. There is some relative strength in oil, but all other major sectors are in the red. The momentum list is almost 100% red.
The key now is that we hold those early lows. Stops are set at day lows and that level becomes particularly dangerous later in the day. If the buyers don't show some persistence, the machines will kick into reverse and try to push us through the intraday low.
In this sort of market, I tend to stay in heavy cash and try to knock out a few smaller trades. Cross Country Healthcare (CCRN), my Stock of the Week, is acting well. I have Matrix Service (MTRX) as a technical buy today and I'm also watching TherapeuticsMD (TXMD) after a big target price from an analyst yesterday. I don't see a lot to do right now, but things are developing. Be careful at day lows. (TherapeuticsMD is part of TheStreet's Stocks Under $10 portfolio.)
Sept. 22, 2015 | 7:01 AM EDT
This Is Just a Good, Old-Fashioned Correction
- · Don't fight it or waste your time complaining.
"Let reality be reality. Let things flow naturally forward in whatever way they like."
Recent market activity has been generating loud complaints about random and illogical action. Some market players are rattled by the fact that the market sold off on a dovish Fed and that we have been pinned in a trading range.
There is nothing particularly unusual about recent market action. In fact, some would contend that a negative reaction to negative events is actually a return to normal. Since the days of the Great Recession, the market has consistently had a positive bias where virtually all news was treated as good news. This was largely a function of a sea of liquidity. Cash needed a place to go, and there was a tendency to find reasons to throw it at the stock market.
With the Fed making more hawkish noises recently, this dynamic has shifted. We don't have this same underlying support that always propped up the market. The economic problems in China and Europe can't be shrugged off as easily. We actually have to grapple with them.
There is nothing unusual about this market. It is just undergoing a good, old-fashioned correction. Many market players, including me, actually believe that it is healthy to have conditions like this once in a while. It shakes out the overly exuberant bulls and reminds us that the nature of markets is to be volatile and random at times.
In the bigger scheme of things, the pattern we see in the S&P 500 right now looks like a very normal correction. We had a breakdown in August, a couple failed bounces, an attempt at a move out of the trading range and another rollover. It is a market in a trading range that is trying to find support and not doing a great job of it. It is action that has occurred many times before.
There are louder complaints now about how computer-driven the action has been lately. The computers don't seem any busier than they have been over the last five years. What is different is that they are using bearish programs. Many market players don't mind the computers when all they do is drive us up. That sort of manipulation is just fine, with many folks that are mostly buy-and-hold investors. They aren't nearly as sanguine when the routine manipulation has a bearish bias.
The best way to deal with the present market is to simply embrace the fact that we are undergoing a correction and the great bulk of stocks are acting poorly. It isn't unusual or unhealthy. It is the nature of the beast. Don't fight it or waste your time complaining about it. I guarantee you that it will eventually come to an end and trading will improve. We just need to protect our capital and wait for the shift to occur. In the longer run, we will be better off for this, so accept it and try to enjoy it a bit.