Timing the market based on contrary indicators is extremely difficult, but the intense gloom and doom this morning turned out to be a very effective buy signal.
There wasn't any one particular reason for it, but the mood was extremely sour this morning. Continued pressure on oil and commodities, the struggles in China and Europe and outright disgust over the Fed's fumbling produced a gap-down open and some intense selling.
We hit bottom late in the day and dip buyers started fishing for some bargains. The buying was aided in part by hope that Fed Chair Janet Yellen might say something market-friendly when she speaks at 5 p.m. ET today. I'm not sure what she can say that the market might like, but the bulls have done well by embracing the Fed.
Despite the intraday bounce, we still ended in the red but the mood did improve. Unfortunately, the action did little to change the problematic technical pattern. We are at the low end of the trading range that has developed since the August breakdown, and there are plenty of reasons to be worried that support may not hold. Intraday bounces like we had today provide some hope, but this market is unquestionably dangerous.
We need to keep it firmly in mind that the overall market is grappling with some corrective action, but that doesn't mean there aren't good trading opportunities. In fact, as I mentioned, some of the best trades tend to be products of countertrend moves. The important thing is that you treat them as trades and don't become caught up in the whole bottom-calling game.
Have a good evening. I'll see you tomorrow.
Sept. 24, 2015 | 12:13 PM EDT
Commodities + China + Europe = Bad Mood
- · The attitude is, 'I just want out and I don't much care about the price it takes.'
It is another ugly day of selling, but what is most notable today is how the mood has shifted. Even though we had a poor technical pattern over the past month, there still seemed to be a high level of hope. The bulls were fairly confident that the Fed might hike interest rates and the market would rally on the idea that the economy really is improving.
Instead of the positive scenario, the breakdown in commodities, the chaos in China and issues in Europe are causing some real concern that we could fall back into a recession. If the Fed can't even hike interest rates a measly quarter point six years after the Great Recession, then things must really be bad.
This negative sentiment is manifesting itself with some capitulatory-like selling. The attitude is, "I just want out and I don't much care about the price it takes." Contrarians look for that sort of activity to signal a market that might be close to a bottom, but trying to time that with any accuracy, especially this early in a selloff, is extremely difficult.
I see plenty of stocks that have pulled back substantially that look like they may be good "values," but you simply can't ignore the fact that the market is in a downtrend. Cheap stocks can become much cheaper when we have the sort of downside momentum we are seeing today.
Despite the doom and gloom, there is cause for optimism. This is the sort of action that ultimately leads to great opportunities. We just have to sit and wait for now.
Sept. 24, 2015 | 10:27 AM EDT
Move Quickly If You Are Going to Play
- · Aggressive traders should be watching for some bounce action to develop; small biotechs still look good.
Market players have been hoping the indices would find some underlying support soon, but negative sentiment has picked up sharply this morning. There is some dumping of stocks as a number of folks just want to escape the pain.
The mood is as bad as I've seen it in a couple years. The carnage in commodities is gaining even more notoriety now, due to the disaster that is Caterpillar (CAT). There is no momentum leadership, right now, and we only have about a dozen stocks even in new, high territory.
I expect to start hearing from the contrarians about how negativity is now so intense that a bounce is about to occur. That does feel possible, and aggressive traders should be watching for some bounce action to develop. The bounces in a market like this tend to be big and fast, so it is extremely important that you move quickly if you are going to play.
I'm still sitting in very heavy cash and have little interest in building longer-term positions. I continue to see some good tradable action in small biotechnology.
My Stock of the Week, Cross Country Healthcare (CCRN), has done an amazing job of bucking the trend. It is up for the fifth day in a row and is becoming quite extended. Last week's Stock of the Week, Trevena (TRVN), is also acting very well, and I added to my position. TRVN makes a drug similar to morphine, so it is well suited for this painful market.
Can-Fite BioPharma (CANF) is another small biotechnology on my screen, and I see Oncothyreon (ONTY) and Lion Biotechnologies (LBIO) in the green, as well. All my positions are fairly small, right now, and I'm flipping to lock in gains when I can.
Sep 24, 2015 | 07:28 AM EDT
Study the Action of 2011
-- Don't be in a rush to declare that the worst is over.
No matter how bad things are, you can always make things worse. --Randy Pausch
Market players have had little experience in recent years dealing with a market downtrend. We have had a few pullbacks and dips, but we are currently undergoing the most protracted correction (if you can call it that) since 2011.
So far, the current action is quite similar to what we saw back then. The market broke down in July and August 2011 and fell into a wide trading range with some major bouts of volatility. The lows of the initial break were tested a number times and eventually failed. There were several big bounces along the way that produced massive failures. Finally, in early October, the indices hit a new low and then turned up and made a strong V-shaped move that lasted nearly a month. There was another pullback but eventually the bounce gained steam and all the losses were recovered by February 2012. Overall, the period of correction lasted about seven months. We then commenced a multi-year uptrend.
There are several lessons to be learned if you study the action in 2011. First is that there are some very nice bounces in the context of a market correction. Back then there were several times when there were strong runs of 5-6 positive days that had people feeling confident that the worst had ended. The bounces sucked them in, but their failures ultimately lead to lower lows. Even a recovery that lasted over a month led to another sharp dip before the V-shaped action really kicked in and took things back to highs.
One of the key lessons of this action is that it takes quite a while to play out. During the entire period there were pundits urging us to hurry up and buy or we would be left out. Eventually they got it right, but you sure suffered through a lot of pain if you acted too early.
Another thing that is quite clear from this action is that the bounces can produce some great trading. It is a matter of style, but if you caught some of these moves you could do very well, even if you never tried to short the market at all. As I've often written, the best bounces always occur in poor markets.
Here is the chart of the 2011 action. Note the number of failed bounces and how strong they were. Also keep in mind that it took nearly six months for the process to play out completely.
It is highly unlikely that the current corrective action is going to play out the same way, but there are similarities to watch for. The main thing is to not be too quick to trust bounces. The other thing is to not be in a rush to declare that the worst is over. Stay patient, trade the volatility and keep a defensive mindset.