It's different this time. The V-shaped bounce that has become almost routine the last few years just isn't happening as easily. The senior indices only had minor losses today, but the Nasdaq and small-caps lagged badly. What was worse was the slow drip of selling all day. A very small group of momentum names led by GoPro (GPRO) and Tesla (TSLA) attracted interest but the vast majority struggled to stay positive.
The S&P 500 and Nasdaq were turned back almost exactly at their 50-day simple moving averages. The DJIA exhibited the best relative strength, but small-caps continue to act like death. Small stocks are back below the August lows and hovering around the lows of the year.
What is most notable about the action is that there isn't any real interest in buying dips. The tenacity of the dip buyers kept this market going for so long but now the action looks dreary and listless. There is very little interest in snapping up bargains.
Now all we can do is be patient. Although it may not feel like it, it is healthy to go through this sort of corrective action -- but it can last for a while and it can be costly if you are overanxious. Sometimes the best market approach is to do very little, and this is one of those times.
Have a good evening. I'll see you tomorrow.
Oct. 06, 2014 | 12:51 PM EDT
A Lesson in Behavioral Finance
- Don't be emotional. Know when to cut your losses.
I've often said that bad markets don't scare you out but wear you out. I have had a taste of that today. It is just plain dreary out there, as we drip lower with hardly a ripple of interest from the dip buyers. Breadth is now negative, and about the only momentum out there is from Tesla Motors (TSLA), GoPro (GPRO) and Netflix (NFLX).
The good news is that opportunities are slowly setting up. The bad news is that we will have to be patient and can't rush to put money to work at this point. There just isn't much to do right now, other than to identify some stocks of interest for future buying.
The most spectacular action in the market today can be found in GT Advanced Technologies (GTAT), which stunned market players by unexpectedly announcing Chapter 11 bankruptcy. The company isn't planning to close down, but it is quite surprising that an entity looking to supply to Apple (AAPL) could be in such bad shape.
GT Advanced Technologies is a good reminder of how traders can blow up. The vast majority of traders who have been wiped out had fallen into the same trap. They had taken large positions in a stock because they believed in the story, and they had convinced themselves that the market had it wrong. Then they made the big mistake of averaging down as the stock kept going lower.
Disciplined traders and investors will always have a point at which they cut their losses. It doesn't matter how much they believe in the story. Before they suffer too much damage, they will bite the bullet and cut their losses.
Unfortunately, many individual traders and investors simply don't want to admit that they may be on the wrong side of a trade. They become emotionally involved, and even become more committed when the price action warns that there is a problem.
There is nothing wrong with buying stocks on weakness, but you have to have some sort of methodology for cutting your losses, if the price action doesn't start to confirm your hypothesis. Nothing wipes out more traders than averaging down into a stock with an appealing story. Make sure you stay in the game, and don't get caught up in stocks that never seem to improve technically.
OCT 06, 2014 | 10:46 AM EDT
Cash Is King
- I'm on hold until conditions change.
Market players wasted no time selling into the opening gap; there isn't as much confidence this time in our old buddy, the V-shaped bounce.
The NYSE still has decent breadth and there's strength in the retailers, gold, steel and energy, but the Nasdaq and small-caps are lagging due to weakness in biotechnology, solar energy and some technology names. Momentum stocks have been steadily sold since the open. Tesla (TSLA), Netflix (NFLX), Google (GOOGL), GoPro (GPRO) and a few others are still green, but others like Tekmira Pharmaceuticals (TKMR), Palo Alto Networks (PANW), Mobileye (MBLY), Arista Networks (ANET) and Nike (NKE) are under pressure.
We'll see if the dip buyers start to show interest, but the action is rather nervous and there doesn't seem to be much appetite for chasing momentum. There have been small pockets of momentum the last few days, but they are not holding up very well today.
My stock of the week is "cash" -- not because the market looks that terrible but primarily due to a lack of setups. The breakdown and slight bounce simply have not put stocks in a very good position for entry. Either they need strong upside momentum or further pullbacks to resistance levels. As a result, I'm on hold until conditions change.
Oct. 06, 2014 | 7:33 AM EDT
A Self-Fulfilling V-Shaped Bounce?
- The fourth dip of 2014 could play out like the last three.
If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience? -- George Bernard Shaw
After a nasty break down and a big bounce last week the market is back in a very familiar position. We are at the point where V-shaped bounces have so often developed and confounded the majority of market players.
In the days prior to the Great Recession, V-shaped bounces were unusual. Typically, after a breakdown there are trapped bulls that are looking to escape and emboldened bears that are looking to take short positions. This normally prevents the market from going straight back up.
In the recent years that dynamic has changed, primarily due to the liquidity created by central bankers, but also because it has become a self-fulfilling event. We go straight back up because market players now seem to think its normal action.
Previously in 2014 we have had three market dips. In all three cases we had two failed bounces and then we found support and went straight back up and eventually hit new all-time highs. The underinvested bulls had to scramble to add long exposure and the skeptics were run over and helped to feed the V.
The big question this week is whether the fourth dip of 2014 is going to play out like the last three. We have had two, big failed bounces and there was quite a washout on Thursday when we made an intraday low and then reversed back up. The action looked quite good on Friday after a Goldilocks jobs report that wasn't too hot or too cold.
The bears will tell us that this time it is different and that it isn't going to be as easy for the bulls. Their primary argument is that the Fed is slowly becoming more hawkish and that is removing the primary tailwind that has made these bounces so easy. In addition, the economies in China and Europe continue to falter and the European Central Bank just doesn't have much ammunition left. Overnight a report in Germany showed factory orders slowed the most since 2009. That pushed up bonds, which are practically yielding zero already.
Seasonality is another issue that favors the bears this time, but this market has fooled the pessimists many times. Money is still extremely cheap and there just aren't many other places for it to go. Unfortunately, if the bounces do fizzle out it is likely going to be very ugly, since so many bulls are counting on this market to come right back.
One positive at this juncture is that many secondary stocks have already undergone deep corrections. Overall, this is not a market that is in the earlier stages of a correction. Over half of the stocks in the market are already under their 200-day simple moving average. The senior indices have covered up what is really going on out there. If they were more representative of the overall market, we would have a very differently looking picture.
One thing to keep an eye on right now is the key momentum stocks in the market. GoPro (GPRO), Palo Alto Networks (PANW), Tesla (TSLA), Mobileye (MBLY), Twitter (TWTR) and a few others have been the main pockets of action. If the market is going to put together a V-shaped bounce, this action should broaden out. But if these stocks falter we are likely in for a very rough ride.
We have some continuation action this morning, but the close on Friday was a bit tepid and the inclination to chase may not be there.