There is nothing like a good old fashioned drubbing to shake things up. Many market players were skeptical about Wednesday's bounce, but few expected it to fail so fast and so dramatically. Breadth was around five-to-one negative, volume was heavy and there was nowhere for the bulls to hide. If you had long positions you took some hits and they can add up very quickly even if you aren't holding much.
The million dollar question now is whether the downside momentum continues. When we have selling of this magnitude you can't expect it to turn that quickly. We've been lucky the last few years that downside momentum has been so limited, but that has been unusual and this seems like something a bit more dramatic. In fact, I probably heard more chatter today about sustained downside than I have heard in years.
If you haven't taken some defensive steps already it is important not to be frozen into inaction in case this plays out further. You may make some poorly timed sales, but it is the only way to protect capital. You can always buy them back.
The good news is that we need this sort of action periodically to create more opportunities. This is the sort of action that allows active traders to rack up exceptional relative performance. The buy-and-holders and indexers have been geniuses for a long time. A market acting like this one changes the game.
Have a good evening. I'll see you tomorrow.
Sept. 25, 2014 | 1:59 PM EDT
Expect More Downside
- I advise working on shopping lists and closely tracking those sto
If the pattern of the three prior corrections this year repeats, the market still has more downside to come. The first bounce attempt failed very quickly and now the bulls are going to be a bit gun shy about trying to jump back in too fast.
The market is stabilizing intraday, but a few hours of very flat action seems to be the tendency now. There has been some extremely dead action in the middle of the day on a very regular basis and I really have to wait until the final hour of trading to get a better feel of the overall mood.
At this point, I'm expecting more downside in the indices, but the problem with looking just at the indices is that about half of the stocks in the Russell 2000 are down 20% or more from their 52-week highs. In other words, many stocks are already in a bear market and many are becoming sold-out.
The best advice I can give right now is to work on shopping lists and then closely track those stocks. I have ZELTIQ Aesthetics (ZLTQ), bluebird bio (BLUE), Sky-mobi (MOBI), Trina Solar (TSL), Spansion (CODE) and TG Therapeutics (TGTX) on my watch list. It isn't time to build big positions, but you will have a big advantage if you have a clear plan for action when the market action improves.
Sept. 25, 2014 | 10:57 AM EDT
The Beast Is in Control
- The bounce failure is punishing the overly confident bulls.
For the fourth time this year we are seeing a failed oversold bounce. The market has quickly given back most of yesterday's gains and breadth is running a very sad four-to-one negative. The bouncy momentum names I pointed out last night have slumped again and there is hardly one that is in positive territory.
If the dip buyers didn't make a showing pretty quickly this sort of action has the making of a trend down day. There are just a few things of interest on my screen such as Cyber-Arc Software (CYBR) and Highpower International (HPJ). I've been forced to take stops in Alibaba (BABA) and Palo Alto Networks (PANW), but I'll be happy to jump back in on strength.
In a market like this one of the best strategies can be to quickly sell weakness, but to be ready to re-buy when the action improves. Selling is just a handy form of insurance and can be quickly undone when conditions change.
The good news is that the last three times we had a failed bounce, the market had a couple of more poor days and then found support and the V-shaped recovery kicked in. The bounce failure seems to be the market beast's way of punishing the overly confident bulls that take it for granted. They need to be shown that the beast is in control and will punish those who start to think this trading stuff is simple.
The market hasn't yet taken out yesterday's low but that is the key technical level that everyone is watching.
Sept. 25, 2014 | 8:54 AM EDT
Be Ready To Move
- The bulls have their work cut out for them today.
Move fast and break things. Unless you are breaking stuff, you are not moving fast enough.
Wednesday's oversold bounce sets up an interesting bull-bear battle. The bulls simply shrug and say "we've seen this before and are heading right back up again." We have so often immediately recovered from dips that it is tough to believe that this time is going to be different.
However, as I pointed out yesterday, the last three times the market has dipped like this we had a failed bounce before a V-shaped recovery kicked in. The overconfident bulls had to suffer some pain before the market rewarded their optimism once again.
Yesterday, there were quite a few bears anticipating another failed bounce. They pressed at the open and then again at mid-day, but by the close they were being squeezed and many were forced to cover. It is doubtful that they are going to give up already, but the action in a number of momentum stocks indicated that the bulls were regaining some energy.
What has been most notable about the action the last few days is the continued interest in some momentum names. It has been a bit narrow, but stocks like Twitter (TWTR), Google (GOOGL), GoPro (GPRO) and even Alibaba (BABA) have been attracting the interest of the hot money. When the market turns weak, the momentum names are generally taken down one at a time. Nothing much is safe when the bears start hitting the high-beta lists, but we don't have that sort of action right now.
The bear's big argument right now is that the Fed is slowly shifting and that is what will drive this market down. There are comments from Fed members James Bullard and Richard Fisher this morning about how rates are going up sooner or later. Bullard comments that at the next meeting it would be "natural" for the Fed to drop its pledge to keep rates low for an extended time. No doubt speculation will pick up in the weeks ahead.
One of the good things about the market right now is that it isn't highly correlated. It isn't moving in tandem with macro events or headlines. There are individual stocks that are working and many that aren't. Small caps have been horrible, but there are some pockets of action -- mostly in larger, more liquid names -- that are encouraging.
The key right now is to let your stocks tell the story and not focus too much on the big picture headlines that dominate in the media. If you had listened to the media you would have missed the carnage in small caps while they celebrated the new highs in the DJIA.
The bulls have their work cut out for them today to keep this bounce going. We will need to make sure we keep stops tight and be ready to bail out quickly if things start to fizzle. Technically, a failure of this bounce makes sense, but, emotionally, the bulls have an edge because they have been so successful in the past.
The best approach right now is short time frames and quick reactions. Be ready to move.