The good news was that we didn't see much additional downside momentum. The bad news is that we didn't bounce at all.
The indices were slightly red, breadth was negative, there weren't any notable pockets of strength and volume was down due to the Yom Kippur holiday. Overall, it was just a dull day made worse by the fact that we are struggling to hold support and not fall into a deeper downtrend.
The bulls were hopeful that the old "oversold" argument would help bring in some buyers, but after an early try things fizzled out and we didn't have much energy the rest of the day. Small-caps underperformed and weakness in oil helped to keep sentiment negative. We also had pressure on biotechnology again, which has deprived us of the one speculative group that had been providing opportunity until this week.
Overall, nothing much changed today. In fact, the lack of a decent bounce attempt lends some weight to the bearish argument. We are still in the trading range that has developed over the last month, but we are in danger of testing the lower levels of support. The pause today seemed to merely delay the day of reckoning.
Once again, I remind you that there should be no rush to try to predict a market bottom. Protect that capital and be ready to go to work when the time is right. The market will let us know when it's feeling better.
Have a good evening. I'll see you tomorrow.
Sept. 23, 2015 | 1:30 PM EDT
We're Seeing Another Failed Bounce
- · Things aren't hopeless enough for this to be a bottom.
Downtrends are a product of failed rallies. Dip buyers are always hopeful they have caught the lows, but when they are wrong and are caught with too much long exposure, they tend to turn into sloppy sellers who just want to escape their mistakes. The bounce fails, the downtrend gains steam and the process repeats.
The conventional wisdom is that eventually bottoms occur on wild bouts of panic selling. That does happen at times, like during the 1987 crash, but in most cases the bottom is not evident until well after the fact. That was the case in both 2003 and 2009. Clear capitulation never occurred. The bottom was mainly a product of disgust and despair and the ultimate lows were unremarkable events.
It is when all hope had been lost that we finally hit the lows. The process of failed bounces creates despair rather than fear. When the real low eventually occurs after a major downtrend, we are well beyond panic at that point.
What we need to keep in mind is that there is no magic formula for predicting market lows. Oversold markets that produce failed bounces are the biggest dangers we face, and that is what we are seeing right now and it is foolish to try to guess when the process will be completed. The best approach is to stay patient and simply let it play out.
I don't mean to sound overly negative. There are some good countertrend trades to be had, but it is extremely annoying to hear pundits tell us that everything is great when they have no basis for it other than hope.
The big picture is negative right now. Keep that in mind as you find ways to navigate. You don't have to stand on the sidelines completely in cash, but that is a fine alternative if you don't want to do the bear-market tango.
Trade them if you can, but don't drink the Kool-Aid of those who want us to believe that the market is fine.
Sept. 23, 2015 | 10:44 AM EDT
Accept the Market's Changing Character
- · We may want a V-shaped move, but we're not seeing that sort of behavior.
After the poor action yesterday it was understandable that many market players were looking for a bounce today. That has been the general tendency of the market for a number of years. Downside momentum is a rare event. After one weak day we always have a sleuth of bears (yes, that is what you call a group of bears) proclaiming that we are "oversold" and ready for a bounce. It has worked and quite often we even end up with V-shaped moves.
This time, however, the character of the market has shifted. Since the breakdown in August, the market action has changed and many of the patterns we have seen for a long time have disappeared. We aren't seeing V-shaped moves, there is a much greater tendency to sell into strength and we even have some downside momentum.
The important thing is that we acknowledge some shifting in the action and try not to impose our pre-existing bias. Yes, we may want a V-shaped move but this market isn't giving us that sort of behavior right now.
This morning, breadth is slightly positive but there is weakness in biotechnology again while precious metals are leading. Momentum names are mixed and the pockets of strength are very narrow.
My Stock of the Week, Cross Country Healthcare (CCRN) continues to buck the trend and is up nearly 10% so far this week. A few names on my radar continue to develop well. I'm watching Can-Fite BioPharma (CANF), BioTelemetry (BEAT), Ixia (XXIA), Matrix Service (MTRX), TherapeuticsMD (TXMD) and a number of small biotech names.
I have a very high level of cash but I'm more focused on fast trades and limited exposure right now.
Sept. 23, 2015 | 6:55 AM EDT
Don't Be in a Rush to Buy
- The market is still acting poorly.
"No enemy is worse than bad advice."
No one can seriously claim that the market is acting well. We had a massive breakdown in August and now we are rolling over and testing some underlying support. The chances of holding don't look that great, and even if we do hold, upside momentum will likely be limited.
Despite this bleak picture, the question that seems to be on the minds of many is "when do I start buying?" The reaction is like unthinking trained seals flapping their flippers when there is a certain signal. The market is down, so that means hurry up and buy.
This reflexive reaction isn't a big surprise. It has been drummed into investors as long as markets have existed, but it is even more pronounced in the current market. Institutional Wall Street wants us to buy. It always wants us to be buyers. The automatic and default position of the big brokers and institution is to be long stocks, always and forever.
The main reason for this is that they don't want us to leave. If we aren't invested in stocks there is the danger that we might take our cash and go elsewhere. Controlling our cash is the main goal of Wall Street. Whether we make money or not isn't important. It can be helpful in making sure we don't move our capital, but as long as those accounts remain in the hands of institutional Wall Street, they have succeeded.
To put it in simpler terms, Wall Street has a bias toward buying. Buy them when they are up, buy them when they are down, buy them here or there, buy them anywhere. The philosophy of Wall Street is much like a Dr. Seuss story.
Sophisticated, successful market players reject this buy bias of Wall Street. They have learned that the easier and most effective way to produce superior results is to not lose money in a poor market. Protecting capital and not losing money is a huge advantage in a down-trending market like we have right now.
The most unproductive thing you can do as a trader or investor is make up losses. If you lose half of your money, you need to double it to just return to even. If you keep losses small and maintain your accounts close to highs, your ability to outperform is greatly enhanced.
One thing you never hear about from the people that are so anxious to buy weakness is whether or not their accounts are at highs. They will celebrate a big gain when they are lucky and catch a bounce off the lows, but you can bet they are still far under their high water marks. They are just making up losses that were created by their zeal to buy into the teeth of weakness.
Don't be in a rush to buy a market that is acting poorly. There are lots of folks that want you to do just that. Some just want their questionable judgment to be supported by others. Just be aware that the advice is often not in your best interest.
This market is in poor shape. It may bounce. In fact, it may bounce big and give us some trades, but don't lose sight of the big picture and don't be in a rush to put your precious capital at high risk. Focus on keeping those accounts near highs and you will do well.