The easy trade this morning would have been a big emotional gap down open but every algorithm out there was ready to buy that setup so they ended up buying before the open instead. The big bounce in futures occurred in the two hours before the open and undercut the easy 'buy the dip' setup. That is the way it works these days when computer programs are the primary market driver rather than human emotions.
The bounce is fading now as the flippers make a quick exit and the value buyers remain nervous about the downside momentum. Downtrends are built on a foundation of failed bounces and that is what we have to watch for at this point.
As I discussed yesterday, the biggest mistake that people tend to make in this sort of action is that they are too quick to buy and don't keep sufficient cash on hand. It is understandable because there is tremendous fear of missing a bounce after an ugly day like yesterday but those bounces are trading opportunities rather than a resumption of a trend.
In reviewing the market this morning, it is obvious that it is not all equally oversold. There are certain sectors of the markets that have been hit much harder than other areas. Small caps in general are already greatly washed out and biotechnology, in particular, has been pounded. Dan Rosenblum of Sharkbiotech.com notes this morning that the Biotech sector (XBI) has been down 1% or more 7 of 8 sessions. The last time that happened was at the November 2008 low.
I'm bottom fishing the biotechnology sector. Some of the names on my radar are Sarepta (SRPT) , HTG Molecular (HTGM) , Viking Therapeutics (VKTX) , Zogenix (ZGNX) , Flexion (FLXN) and Corbus Pharmaceuticals (CRBP) .
Much of the market still is extended but the biotechnology sector has been under more severe pressure for longer and looks ready to bounce.
One name that continues to see extreme pressure is Square (SQ) . Square has always had an aggressive valuation but the market embraced it due to the price momentum and strong growth. Recently an analyst questioned its growth as that has become more dependent on lending rather than loan processing. On top of that its highly valued CFO announced she was taking a job as a CEO elsewhere.
The stock has become a battleground and in the current market environment there is little inclination for the 'value' buyers to step up. Square trades with a trailing PE of 228 but is growing EPS at about a 70% pace. That is still an aggressive valuation and in this environment there is no rush to pay it especially when a key employee is leaving.
If you are interested in Square longer term be patient and wait for the drama to end. The stock will eventually find some new support but based on the current action it may be quite a bit lower.