If you were holding a big supply of long positions overnight you probably didn't enjoy the action very much today. It turned into quite an interesting day. The market bounced back from the very poor open, but then rolled over again and cracked the intraday low. The second bounce was more successful and we ended up closing near the highs of the day. The indices were still solidly red but the dip buyers were providing support and that is key.
What was of particular interest was that small-cap stocks outperformed once again. The iShares Russell 2000 (IWM) finished up about 1% while the Dow Jones Industrial Average was down by that amount. That is big reversal from what was going on back in late September when the DJIA was covering up the very poor action under the surface.
Small-cap and momentum stocks led this market down over the last month or so and have already corrected far more than the major indices. Will they now find a bottom and lead us back up as the senior indices finally catch up on the downside?
After the close, Netflix (NFLX) had an extremely disappointing earnings report, which is going to create some nervousness as the bulk of earnings season rolls out over the next few weeks. Nonetheless, there were some positive signs in the washout today and we'll have to watch closely to see if they develop further. Breadth was almost even by the close and that is an indication that the buyers were bargain hunting while the news media obsessed over the irrelevant DJIA.
We definitely shouldn't throw caution to the wind as the trend is still solidly negative, but for a day with the biggest loss in Dow points in years, it looked downright healthy in a few places.
Have a good evening. I'll see you tomorrow.
Oct. 15, 2014 | 1:51 PM EDT
A Return to Reality
- Today's market action is healthy in the longer run.
Market players were hopeful that the big-gap-down open to start the day would bring negativity high enough to create a washout. That proved not to be the case, and we are making new intraday lows, as the dip buyers have now turned into sellers.
At this juncture, there is so much downside momentum that it is impossible to talk intelligently about support levels. We have some real fear in the air now, and even the folks on CNBC are talking about the possibility that the selling isn't going to end that quickly.
This action is a good example of why you simply can't be in an anticipating mode. If you have been building up positions in anticipation of a bounce, you have been buried and have to make up an awful lot of ground. It is better to simply stand aside and wait for improvement. You might miss out on some early gains, but you will definitely avoid some of the late losses.
I know that many market players are suffering pain due to this action, so I don't want to sound flippant, but this action is very healthy in the longer run. We've needed to end the artificial feel to the action that has been created by years of central bank manipulation.
Many market players never really believed in the market. They just felt like they had to embrace it, because there was a wave of cheap money that wouldn't let things create. In many ways, this action is a return to reality. It reminds us that things other than the central banks do matter. We can't ignore the reality of a lousy economy, just because the Fed is being accommodating.
If you have taken appropriate defensive action lately, you should be sitting on plenty of cash and feeling optimistic about the opportunities that will eventually occur. If you protect that capital, this correction will end up being one of the best things that has happened to the market.
OCT 15, 2014 | 10:40 AM EDT
A Good Time to Have a Shopping List
- This is the sort of action needed to start the bottoming process.
After two days of flattish opens, the bounce players finally got the sort of bounce they needed this morning. There was a bit of panic and that has helped to wash things out and give the market a momentary low. The buyers have been waiting for this sort of dip and they are taking full advantage so far. It is premature to call a bottom, but this sort of open is what will help the market find some support.
The most interesting thing this morning is that small-caps are outperforming and the iShares Russell 2000 (IWM) is in positive territory. Considering how much the senior indices are down breadth isn't that bad with about 2,000 gainers to 3,500 decliners. Quite a few stocks on the momentum list are also green, with names such as Twitter (TWTR), Baidu (BIDU), Palo Alto Networks (PANW) and F5 Networks (FFIV) acting well.
The most important thing now is that the market hold above the early lows. If it can do that the buyers that missed loading up on the open will start to inch in and help to provide support.
This is the sort of action needed to start the bottoming process. At this point, it is a good time to make sure you have a solid shopping list and are mentally prepared to act as things set up again. There aren't many good technical setups right now, but if the lows are held that will start to change.
I took a little Apple (AAPL) in to the early weakness. The company is making some product announcements tomorrow which should help it bounce a bit. Pernix Therapeutics (PTX) is my top technical pick right now and I'm looking to add to that position as well.
Oct. 15, 2014 | 7:59 AM EDT
Look for Disgust, Not Fear
- Bad markets don't scare you; they wear you out.
"Rock bottom became the solid foundation on which I rebuilt my life."
― JK Rowling
As we contemplate the worst market action in three years it is important to keep in mind that stocks go down differently than they go up. Action in the market is not symmetrical. The strategies the help you deal with upside momentum do not work as well with downside momentum.
One of the main reasons for the difference in action is that market players primarily have a bullish bias. When we are trending upward, they are happy to embrace the action and see it continue. When we break down, there is intense focus on trying to predict when the selling will end. Market players don't just embrace the fact of a downtrend and stay with it. They want it to end quickly and suddenly, which is why we so often have big counter-trend bounces within a market downtrend.
It is often said that stocks go up like an escalator and come down like an elevator. The action of the last couple weeks illustrates that well. We've given back months of steady gains in a market in a very short time.
Downside momentum is much more intense, which is why it tends to burn out faster and bottoms form much more quickly than tops. Tops tend to be a process that plays out over a longer period of time. If you look at the SPDR S&P 500 ETF (SPY), you can see that it took nearly a month for the recent top to form.
Bottoms tend to come very quickly. Every correction in the last few years has tended to end with a quick reversal. There were no retests or basing action. We simply made a low one day and then we moved straight back up. The V-ish nature of the moves is not typical, but bottoms do tend to occur much faster.
One fallacy about market bottoms is that they tend to be a product of dramatic capitulation. That did happen in 1987, but if you look back at other major lows, like in 2002 and 2009, the bottoms came without any fanfare. The day that we finally made a low and turned back up was very unremarkable.
I've often written that bad markets don't scare you, they wear you out. You can't time a bottom by anticipating some major capitulatory event. The low will come when disgust levels are at a maximum, and people are simply sick of a market that never seems to go up. Sentiment at the bottom will reflect a high level of disdain and dislike, rather than fear.
The big danger in down-trending markets is that the big sudden bounces are so appealing to trade. They suck in buyers who have been beaten up lately and are anxious to rack up some gains. If the bounce doesn't hold, it causes great pain and gives us more of the disgust that will ultimately lead to the market low.
Right now, the most important thing you can do is stay defensive and not worry much about catching that exact low. The folks in the media are going to push very hard for you to buy. The phrase "buying opportunity" will be used quite often.
Just keep in mind that there will be plenty of time to jump in when a new uptrend develops. You might miss the early stages of a big bounce, but it is far more important to protect capital than it is to time the exact turning point.
We have more pressure again this morning. Maybe if we actually have a gap down rather than a flat open it will help to produce the washout folks have been looking for over the last couple of days.