The action doesn't come much worse than what we saw today. Not only was the biggest one-day rally in over a year wiped out, but also it was done in aggressive fashion on increased volume and breadth of 725 gainers to 5,000 decliners. The markets closed at the low of the day and left many market players badly shaken.
After the move yesterday, we had quite a few hopeful bulls thinking our old buddy the V-shaped move was back. When we failed to see any follow-through to start the day, the sellers started to make their exits and it picked up steam all day. It was a wrecking ball of selling.
So now what?
We give the bears some respect and stay out of the way. The bears have been goofballs for years with their constant predictions of market tops, but now they finally have four big failed bounces in a matter of a few weeks, and the momentum is in their favor. They were going to get it right eventually, and this is the time.
We respected the trend on the way up and gave it room to continue. Now we need to respect the trend on the downside and not be in a rush to predict a turn. This market stinks and there is no reason to believe it won't continue to. Stay safe.
Have a good evening. I'll see you tomorrow.
Oct. 09, 2014 | 1:10 PM EDT
The Mood Turns Bleak Again
- This sort of volatility is not typically a positive sign.
There was quite a bit of excitement Wednesday about how the indices had their best gains in over a year, but they've given almost all of it back and the mood has turned bleak again.
The rally was triggered by dovish comments in the minutes of the Fed's September meeting. This morning, several Fed members downplayed the dovish comments with comments about how the market is not reflecting the likelihood of higher rates. In addition, European Central Bank President Mario Draghi commented about the struggles of the European economy.
While there are so few news catalyst for the reversal, what is really driving it is simply the fact that there wasn't any good follow-through. The traders that normally add to positions and chase strength ended up flipping yesterday's buys to lock in whatever gains they may have had. There was hope that yesterday could be the start of another V-shaped bounce, but when it didn't quickly materialize, there was no reason to hold on to positions.
The swings in the market over the last few days are the most severe we have had in many years. Unfortunately, that sort of volatility is not typically a positive sign. It reflects uncertainty and confusion, and that normally resolves itself with selling rather than buying.
I've often written that the essence of a downtrend is a failed bounces, and we are looking at another big failure now. The action is still above recent lows, but they are beckoning and likely to be tested now.
The good news is that we've needed a correction for a while, and once this one plays out, we'll have very good opportunities again. It is the nature of the market beast to act this way, but ultimately it will set up the next leg higher.
Just make sure you protect capital in this messy market.
Oct. 09, 2014 | 10:43 AM EDT
Still Much Uncertainty
- Larger-cap names will need to lead this market.
The big spike on Wednesday caused many bulls to proclaim that a bottom in the indices has been made. Maybe it has, but it is not shaping up to be another quick and easy V-shaped bounce. We are struggling to build on yesterday's momentum and already the Russell 2000 (IWM) has given back more than half of the gain. The other indices are holding up better, but breadth on the Nasdaq is running a very pitiful 500 gainers to 1867 decliners.
After a big jump it isn't surprising or unhealthy to have some backing-and-filling. This allows the short-termers to flip and more confident buyers to emerge. What we have to watch for is how deep the pullback goes. At some point it is going to start triggering more stops and will turn into another failed bounce.
The important thing right now is that we don't dip too much more. If we can hold up for a while then buyers will gain confidence and start to add to positions. Right now there is still much uncertainty and the risk of a deeper pullback is high.
There are a few pockets of action out there -- but not much. Ebola-related names such as Lakeland Industries (LAKE), Alpha Pro Tech (APT), Ocean Bio-Chem (OBCI) and Clorox (CLX) are on the trading radar. We also have better action in names like Alibaba (BABA), Mobileye (MBLY), Apple (AAPL), Tesla Motors (TSLA) and Palo Alto Networks (PANW).
Small-caps are still very dangerous right now and if you are playing them you have to be highly selective. Larger-cap names will need to lead this market and, hopefully, that action will broaden out as technical conditions improve.
Oct. 09, 2014 | 7:06 AM EDT
Waiting on the Power of the 'V'
- Let's see if another straight-up bounce materializes.
I think I can. I think I can. I think I can. I know I can. -- Little Engine That Could
Does Wednesday's big market bounce signal that a technical bottom has been formed and the major indices are now ready for another quick recovery? Such a move is indeed how a bottoming process would begin -- but it is just the first step.
While the rally on Wednesday was the biggest of 2014, it also followed one of the worst days of the year - and the S&P 500's net result was a gain of just 4 points, or 0.21%. That certainly is an improvement but, unless you had impeccable timing, it made things quite challenging. As one trader said to me, "I've never seen a market punish prudent money-management decisions like this one does."
The important factor now is that the indices hold above crucial support levels -- which are the recent lows -- and that they see some upside follow-through. The key to this is not merely another positive day, but one that's accompanied by accelerating volume -- and this should come a few days from now, after this one-day bounce is digested. Such a session would signal that the bulls are back on track.
Of course, the bulls are hopeful that Wednesday's move is the kick-off of another "V"-shaped bounce. Given the history of the market, they have good reason for that belief. As I've discussed previously, this market has seen three dips prior to the current one. In each case we saw a failed bounce or two, and then the "V"-shaped bounce kicked in and the averages went straight back up to new highs.
Before the current move we saw three bounce attempts, all of which failed miserably. Some pundits believe the market has undergone a change in character, and that this is just going to be another very short-lived recovery attempt. While that may be the case, the die-hard bulls are optimistic that the minutes from September's Federal Open Market Committee (FOMC) meeting will be sufficient to put the market back in gear. After all, the Federal Reserve has been the primarily driving force for so long -- and the Fed has made it quite clear that it is in no hurry to raise interest rates on U.S. Treasury bonds given the weakness in economies around the world, few signs of inflation and a strong dollar.
Yes, there is increased talk about the Fed doing away with the "considerable time" language in their policy statement -- that reference to how much longer rates will be kept low. However, as the Fed has emphasized, it is data-dependent, and that the data just aren't very good. The central bank may not be the same tailwind to the market that it had once been, but it has no intention of being a headwind either.
The market now needs to show us that it still has the power of the "V" behind it, and earnings will likely be the catalyst for the success or failure of another such bounce. Alcoa (AA) kicked off earnings season Wednesday night with a good report, but key numbers don't start rolling in until next week: JPMorgan Chase (JPM) and Wells Fargo (WFC), for instance, are due to report on Tuesday morning, and Intel (INTC) is set for Tuesday night.
Expectations for earnings appear to be quite low due to the struggling European economies, but it is not clear whether that is priced in to the stocks, even after the recent corrective market action. We'll simply have to wait and see how things shape up.
For now, the issue is upside follow-through. If the bulls falter again, it is going to have a major impact on investor sentiment, which has already been quite poor amid low levels of trust. That said, if the bulls can hold on to most of Wednesday's gains, that will suck in some buyers -- and they, in turn, will start to worry about being left behind. If the market slips too much, though, the shorts will be emboldened and the bulls will quickly head back to the sidelines.
The best approach right now is to stay vigilant and see how the price action develops. It is far more important to be flexible and open-minded than it is to try predicting how things will play out from here.