Overnight indications were for a big gap down open but futures bounces back sharply and the marked ended up with a flat open. That changed the psychological dynamics and helped to produce another very poor day of action. When we couldn't build on the pre-market momentum, we stumbled about. Finally, the buyers just gave up and the market closed at the lows again.
Momentum stocks notable led to the downside today. They started off very poor, bounced in the middle of the day but then the bid disappeared and down they went. We only saw a total of 34 new highs today, which is a sign that there are no pockets of momentum.
The only group of stocks that attracted any buying interest were Ebola-related names like Lakeland Industries (LAKE), Alpha Pro Tech (APT), iBio (IBIO), and Esperion Therapeutics (ESPR). All day long we heard stories about possible new cases in various parts of the country and that helped to contribute to the poor action in the afternoon.
If the market had actually gapped down big to start the day, we would have had a much better chance for seeing some healthier action and a possible intraday reversal. The market is still stretched enough to the downside for some sort of bounce, but the levels of fear and disgust are building. So, even if there is some counter-trend movement, it may be deemed a means of escape rather than a sign of turn.
Stay cautious and protect capital. The opportunities will come but we'll need to be patient.
Have a good evening. I'll see you tomorrow.
Oct. 13, 2014 | 13:36 PM EDT
Due for Some Oversold Bounce Action
- But the risk of another reversal is high.
There is some stabilization now, but the big danger in this market is being too quick to assume that it is safe to jump back in. We have to keep in mind that the essence of downtrends is failed bounces and the more there are, the more likely that additional ones will occur. Once market players lose confidence in the likelihood of V-shaped bounces they tend to flip faster and reload shorts into strength. That makes the bounces more likely to fail faster.
The good news is that it looks like many momentum stocks were washed out on some very poor action early in the day. They triggered stops and most of them have reversed very nicely off their early lows. We also have some relative strength in small-caps although the buying is not at all aggressive.
CyberArk (CYBR), my Stock of the Week, is acting well and I see a few other odds and ends of interest like RadNet RDNT) and Twitter (TWTR), but I'm going to wait to see how the market closes before making any bigger moves. We are due for some oversold bounce action, but it is still very tentative and the risk of another reversal is quite high. The longer we hold up the better and if we can close near the highs that may at least give us a little longer lasting bounce.
Oct. 13, 2014 | 10:10 AM EDT
- Don't be drawn into the bottom-calling game.
Despite some big swings overnight, the early market action is not very inspiring. We saw a slight bounce but that is being met with selling by flippers and trapped bulls. Shorts are also reloading and going after names such as Tesla (TSLA), Mobileye (MBLY), Palo Alto Networks (PANW), GoPro (GPRO) and Netflix (NFLX).
About the only area of positive momentum is in Ebola-related names including Lakeland Industries (LAKE), Alpha Pro Tech (APT), Sharps Compliance (SMED), iBio (IBIO), etc. They are feeling a bit frothy to me so I have sold the last of my plays for now.
Part of the problem this morning is that too many folks were expecting a bounce. They didn't even wait for the open before they started to buy and that hurt the chances of a better bounce. We are now seeing a clear technical hurdle at the highs of the day. If the market can regain those levels, it may bring in some buyers. However, the lack of confidence out there is preventing any major dip buying right now.
Stay patient, protect capital and don't be drawn into the bottom-calling game. That is the way to deal with this market right now.
Oct. 13, 2014 | 7:57 AM EDT
Don't Be Too Trusting
- This market has yet to prove itself.
The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails. --William Arthur Ward
Emotions are running very high this morning as S&P 500 futures bounce off overnight lows. Better-than-expected economic news out of China is part of the catalyst, but it is also the nature of markets to snap back sharply after the sort of selling pressure we saw last week.
When it comes to the sort of corrective action we've experienced lately, the big positive factor is that countertrend trading can offer some great opportunities. Once you have taken appropriate defensive action, it can be quite lucrative to play short-term bounces, which can be quite dramatic within market downtrends. In fact, the biggest moves almost always occur when the market has been performing the worst.
In this sort of market environment, it's important that you be very clear about your style, as you won't get bailed out if you make a mistake. If you try to average your positions into share weakness, you could encounter some real problems if your timing is wrong and you start buying too much, too soon.
When you play oversold bounces, the biggest danger lies in letting a good trade turn into an investment because you haven't managed it correctly. You can't just sit back and expect things to go straight back up. You have to be prepared for the fast exit if your trade isn't working.
In a correction, it is crucial to remember the first rule of holes: If you are in one, stop digging. Corrections are actually quite enjoyable, and they should make you optimistic if you have positioned yourself correctly. Unfortunately, too many folks try fighting the trend and hold too much long inventory -- and they end up with a steady of supply of losses. When the market is behaving poorly, you have to stop trawling for stock picks and just wait it out. When the turn comes, you can make it back very quickly, and if you have kept accounts near their highs you will outperform.
Otherwise, be prepared to hear lots of talk about whether this broader correction is over, even as there is no clear evidence that the trend is about to shift. It is, after all, the nature of Wall Street to play the bottom-calling game -- which is more about seeking attention than it is about actually making money.
You don't make the big money by calling market turning points. You do it by riding trends aggressively when they occur. Trends produce huge percentage moves. On the other hand, if you try to call turning points, you might be lucky to catch just a few points.
So we want be ready to catch uptrend when it emerges -- and you don't need to be fully invested at the exact low in order to do that. In fact, if that is your goal, you are very likely to incur substantial losses while trying to play that game.
While the market bounce overnight is causing a little sigh of relief, this market has much more work to do before it can prove itself. Earnings season picks up steam this week, and that may help shift the focus, but do keep in mind that the bears have the edge, and that they must be given some respect.
Right now indications are for a flat open. It probably would have been better if the market hadn't bounced this early, but we'll see how things develop. Don't be too trusting too quickly.