After a five-day winning streak for the S&P 500, the bulls were becoming quite excited. It was the best run of the year and the fact that we have been suffering through some brutal action recently made it feel even better.
If you take a step back and look at the bigger picture, there isn't anything that fantastic about the action. It was a good bounce within a trading range. We have had a few of them since the market cracked back in August and we are still mired in the same range.
What makes it even tougher to be overly positive is that the whole premise for the recent move is that the extremely poor August jobs news means the economy is so painfully weak that the Fed can't possibly raise interest rates soon. The bulls have lived off low rates for years, but many market players are growing impatient for a better economy rather than central-banker engineering.
Breadth wasn't bad at all today, with about 2,900 gainers to 3,000 decliners. A bounce in oil was the best action and we also had some strength in precious metals again. However, another pounding of biotechnology and medical-related stocks cast a pall over stocks that were the speculative favorites for a long time. Momentum names like Amazon (AMZN) and Tesla (TSLA) also did poorly and that impacted the mood as well. (Amazon is part of TheStreet's Growth Seeker portfolio.)
The bulls have some positives to work with, especially the bounce in oil, but the big picture remains quite unclear. We are in a trading range, so keep on trading it.
Have a good evening. I'll see you tomorrow.
Oct. 6, 2015 | 12:45 PM EDT
Behind Every Silver Lining, There's a Cloud
- · Market bulls have jumped the gun on their optimism.
Since the positive reaction to weak jobs news last Friday, there has been a rush of hopeful bulls proclaiming that the market is now back on track to the upside. While it is understandable that there is some renewed optimism after a few strong days, there is no technical basis for such thinking. As I've mentioned numerous times, we are still in a very large trading range and haven't even come close to testing the upper levels of resistance.
This is classic trading-range action. We had a good bounce off the lows and are now pulling back again as flippers and bears go to work. The key for the bulls at this point is that we make a higher low. If we can do that, we will have greater support for a better assault in overhead resistance.
What isn't so normal is the continued carnage in biotechnology and medical-related stocks. The health care stocks are being tarred and feathered again and makes you wonder if there are some funds in the sector dealing with forced distribution.
While the bulls will argue that this is a sector-specific issue and is not unreasonable given how much the group is up over the last few years, it is still quite worrisome for the broader market. Quite often, this sort of corrective action tends to rotate and spread into other areas. It doesn't stay contained. Usually all the speculative names eventually are taken down.
That process has already played out to a great degree. For a long time prior to the corrective action that started in August, I pointed out how the average stock had been acting poorly for a while. Many individual stocks have been in a bear market for most of 2015 and the biotechnology sector is evidence that the rotational bear market is continuing.
We are hitting the lows of the day as I write and taking some stops and playing defense once again. This is trading-range action and we are on the downswing again.
Oct. 6, 2015 | 10:49 AM EDT
Upside Momentum Lacks Heat
- · It's highly doubtful we will go straight up from here.
One of the keys to market strength the past few years has been very aggressive dip buying. In fact, the dip buyers were often so aggressive that they didn't even wait for dips and we'd see V-shaped moves instead.
The dip buyers made an appearance this morning following the soft open and have turned breadth positive. We have leadership in oils and metals while biotechnology, retail and drugs are the laggards. Biotechnology continues to be a barking dog and is still struggling to find support after quite a pounding. There has been a major change in character there and traders are simply giving up on the group, which used to be their favorite.
Right now the best leadership is in big-cap technology names, including Alphabet (GOOG, GOOGL) and Amazon (AMZN), but it's a mixed bag with Facebook (FB), Apple (AAPL) and Tesla (TSLA) struggling. While market players are trying to put money to work, which is benefiting stocks like General Electric (GE), there isn't the sort of momentum leadership that really causes things to heat up.
I have not been very successful putting money to work so far this week. I have a few things on my radar such as Shopify (SHOP) and LGI Homes (LGIH), although my positions remain small and I have tended to be a seller into strength when I have a choice.
Overall, I'm not convinced that the trading range has been resolved to the upside. I'm approaching this market with the thought that we are going to see further volatility. Maybe we have seen the lows but I highly doubt we will go straight up from here. That is good for trading but will irritate the bulls that are anxious to proclaim that the worst is over.
Oct. 06, 2015 | 7:06 AM EDT
The Market Is at a Key Juncture Right Now
- We have the start of a good recovery, but watch earnings season.
"The secret of change is to focus all of your energy not on fighting the old, but on building the new."
The market is doing exactly what it needs to do in order to regain its composure, but earnings season is going to determine how things develop.
Following Friday's big positive reversal on bad jobs news we had some picture-perfect follow-through on Monday. We gapped up and then trended up all day on excellent volume. That is exactly what you want to see to signal that momentum is rebuilding.
Technically, we still have some very significant overhead resistance around the 2000 level of the S&P500 and we are going to need a solid positive catalyst to push up through and hold us there. We are now approaching the levels we hit following the FOMC September meeting. That is the top of the range and is the natural point where flippers take profits and shorts try to reload.
There is no big mystery as to what is driving us right now. Following the bad jobs news, the chances of a rate hike in October have fallen to just 10%. The likelihood of a December hike are falling fast as well. Economists like Jan Hatzius of Goldman Sachs say that hikes will likely now occur well in 2016 or even beyond.
With rate hikes on hold, what we really need are good earnings reports to keep the market chugging along. The market loves zero interest rates, but the big fear lately has been that zero rates have done nothing to boost the economy. If earnings season is poor, the fear that we are sliding into another recession will undermine any positive impact from the continued flow of cheap cash. The market has loved low rates, but that love affair is growing old, and there is now a desire for some real growth.
While the market is showing signs of better health, the big challenge for market players is putting money to work. If you haven't been willing to buy broken charts and oversold bounces, you haven't been able to put much money to work. When we undergo a correction like we have seen recently it takes a while for better charts to develop. If your style is trend or position trading, there just aren't going to be many setups.
The folks that profit best are those with very short-term timeframes, who buy for quick bounces. These typically are not stocks you want to hold for long, which is why V-shaped moves are generally not expected. However, as fear of being left out takes hold, these bounces can develop further and produce the sort of action that sucks in more buyers.
The market is at a key juncture right now. We have the start of a good recovery, but face substantial overhead resistance as well as the potential issue of earnings seasons. The Fed is out of the way for now, which is the big positive, but the problems of a weak economy are still there. We've overcome that quite well for many years, but folks are growing weary of poor growth.
Early action is a bit weak, but underinvested bulls are looking for dips.