Downside follow-through is a fairly rare phenomenon in this market, but we had a good dose of it today. The dip buyers made a feeble attempt shortly after the open, but they were never able to produce much energy. Breadth slid most of the day, and it was two-to-one negative by the close.
One bright spot was the interest in key momentum names like Facebook (FB), GoPro (GPRO), Ambarella (AMBA) and Apple (AAPL). It was quite narrow but it was apparent that market players are trying to find some place to park funds and they are gravitating toward a few big cap momentum plays.
Market players are starting to talk about the market being oversold, and many are confident that a bounce will come very quickly. That has been the tendency, and it is preventing the negativity that we used to see when we had a real correction.
During the uptrend, I had often said that there was no reason to start anticipating a top. The reverse now holds true. There is no need to act as if the market is going to suddenly go back up. We are likely to have some bounces, but the bears have the advantage now, and they deserve a little respect. They haven't done a very good job in the past, but they have a better edge this time.
Have a good evening. I'll see you tomorrow.
SEP 23, 2014 | 2:02 PM EDT
Good Reasons Not to Feel Positive
- But interesting entry points are developing for patient investors.
The bounce attempt today is downright anemic. The market has rolled back over and breadth has sunk to 2,050 gainers to 3,500 losers. A few momentum names are still up, but small-caps are lifeless and there are no real notable pockets of momentum. A few odds and ends, such as GoPro (GPRO) and China Finance (JRJC), are attracting traders, but there isn't much.
One rather humorous development today is that the folks on CNBC seem to have suddenly discovered that small-caps are lagging. They have been lagging for many months, but now there are headlines about 'death crosses' and asking if small caps will lead the market lower. They have ignored the small caps for a long time, but now they are providing some convenient headlines so we will hear more about them.
If the senior indices had corrected like many small caps, the bit question would be whether things about to bottom. The corrections in many individual stocks is what you'd expect to see in a bear market, yet the folks in the media keep talking about how things are 'going gangbusters'.
The lack of bounce in this market is a bit worrisome and sentiment is starting to turn rather gloomy. It has been rare even to have extreme negativity in this market and we are still far from it. But it interesting to see how the mood is starting to shift. If you take a hard look at small caps and the average stock in this market, there is good reason to not feel so positive about what is going on.
We are hitting intraday lows as I write, which is not what you want to see at this point in the day. The good news is that there are some interesting entry points developing if you stay patient.
Sept. 23 2014 | 10:05 AM EDT
Smell the Recovery
- It's hard to tell if it's a V-shaped upturn but there's hope.
We have a little dip-buying following the gap-down open this morning, but the actions aren't very aggressive so far. Breadth on the Nasdaq Composite has moved to even, and momentum names are doing better than that. The small-caps are actually outperforming for a change: solar energy and biotechnology are leading. Gold has also come back after a relentless beating.
Is this the start of another quick and easy recovery? The market has been recovering in this pattern over the last few years: it would start with a slow bounce and gain steam as the folks on the sidelines start to inch back in. If we don't fade again, the buying intensifies. Before you know it, another V-shaped recovery has started.
The bears would argue that this time it is different. Economic weakness in China and Europe is weighing on sentiment. The Fed is still dovish, but it is not providing the liquidity they once did, and seasonality is very negative. Over the past few years, every time I had thought another V-shaped move would be unlikely, I had been proven wrong. It is hard to not think that way again, but we need to keep an open mind. There is still plenty of liquidity, which continues to be the driver in this market.
I continue to do very little, but I am eyeing a few things. I started a small position in Alibaba (BABA), which I believe will be a ''go-to'' name when the market improves. Technically, there is risk of further downside, especially as the ''short YHOO, Long BABA'' trade is unwound, but I want to put it on the radar and be ready to be aggressive with it as it develops.
Solar energy is looking better, and I'm inclined to add to Trina Solar (TSL), my stock of the week. I would also like to add to Canadian Solar (CSIQ) as it finds support and turns up. I'll be looking for more buys as the day progresses.
SEP 23, 2014 | 7:45 AM EDT
Strap On Your Trading Helmet
- It is an extremely tough slog out there.
No matter how bad things are, you can always make things worse. --Randy Pausch
One of the most difficult decisions in trading concerns how defensive you should become when the market starts to slip. If your timing is good, you can produce exceptional outperformance by selling quickly at the first sign of trough and then rebuying when the price action improves. Typically the ability to avoid the market downside is how traders end up beating the market.
In recent years this sort of strategy has been very challenging to implement. Just when it looks like the market may finally undergo a deeper correction, it will reverse quickly and go straight up. All this creates a supply of underinvested bulls who then feed the upside move and help to create another "V"-shaped bounce. This, in fact, is the primary reason that the average hedge fund has underperformed the market the last two years.
Another reason this market has been tough on traders is that the major indices do such a poor job of revealing what is really going on. If you glance at the Dow Jones Industrial Average, it looks like the market has just had couple days of selling after hitting an all-time high. Usually that is no big deal, and is actually quite healthy when things are extended. But, again, it is not an accurate reflection of the underlying action.
What is really going on with the average stock is more clearly seen in the small-cap index ETF iShares Russell 2000 (IWM). Small-caps never moved close to their all-time highs in the past couple months, and many are down 20% or more and deep into "correction" territory.
The challenge for market players is that the senior indices are now exhibiting ugly cracks in their uptrends, and this requires us to be more defensive, yet the majority of stocks under the surface have already corrected. That doesn't mean that they can't continue to trend downward, but if you haven't already made some sales and taken defensive action, you are late to the game.
The bulls are shrugging and telling us that this is just another small hiccup that will be quickly forgotten. Since many of them are indexers, they don't pay attention to the terrible action in individual stocks. All that matters to them is that the S&P 500 is trending upward, and at this point there isn't a whole lot of damage to that index.
For the active trader who tries to pick individual stocks, it is different story. There are very few places to hide, and it is downright dangerous to be heavily long momentum and small-caps stocks. There is no choice but to stand aside and to avoid any attempts to bottom-fish these stocks that haven't exhibited much bottoming action, even through many are now "oversold."
Ultimately protecting capital has to be the primary concern of traders, and given the poor action out there that means taking stops, cutting losses and standing aside until the action improves. We may see another of these quick recoveries and "V"-shaped bounces, but we can't start anticipating that at this point because the consequence of being wrong are so great.
One thing I haven't mentioned is shorting. This market has been extremely unkind to the dark-side warriors for so long that it is tough to do much in this area. But if the market is really undergoing a change in character, that may actually change.
It is an extremely tough slog out there right now, so make sure your trading helmet is buckled on and proceed with great caution. This is a market for defensive -- so that we will be ready for aggressive offensive when conditions change again.