For a second straight day, dip buyers jumped on a weak open and small-cap stocks outperformed. A poor showing Wednesday by Netflix (NFLX) and chatter about the precarious economy in Europe killed sentiment overnight, but traders treated it as a good opportunity and didn't hesitate at all to jump in when the market gapped down again today.
What continues to be the most surprising thing about the market is the relative strength of small-caps vs. the DJIA. We had the exact opposite action in August and September, which ultimately was a sign of a market top. You have to wonder if the inverse is now true and small-caps are signaling a market bottom.
Typically, conservative big-caps tend to lead at a bottom. Higher-risk, speculative small-caps usually start to heat up only after the market has found its footing and acted better for a while. It is unusual to have small-caps show this sort of relative strength, but it may be because so many have already been hit so hard.
The underlying action the last couple of days has been quite good and suggests the possibility that a low has been made. Unfortunately, the Google (GOOGL) earnings report is a miss and that is going to be a problem if that theme continues. Netflix hurt the momentum stocks today, and Google isn't going to help either.
The market still has work to do to regain its footing, but we've had two days of better action and that is a good start. It could very easily roll over again, so stay vigilant. But buying support is out there, and that is the important thing.
Have a good evening. I'll see you tomorrow.
Oct. 16, 2014 | 1:08 PM EDT
Inching Back In
- Still in a downtrend, but taking a few steps toward recovery.
The action so far today is playing out much like yesterday, and that is a positive. We saw some panic to start the day, but the market bounced quickly and now it is important that we see a solid close. Small-cap stocks continue to outperform and breadth has improved nicely to 3,500 gainers vs. 2,150 decliners. Momentum stocks have been lagging but have improved with a bit more than half now in positive territory.
There is still a high level of skepticism, but the longer the market can hold in positive territory, the more it will push those on the sidelines to inch back in. The difficult thing is that the recent action has made a mess of the charts. If you are buying, you are most likely buying oversold bounces rather than a chart with a good setup for a position trade.
The dip buying support, the outperformance by small-caps and improvement in momentum names are signs of a healthier market. The overall downtrend is still in place, but action like we are seeing now is a good step toward recovery.
I'll be looking for new buys into the close, but my level of aggressiveness will depend on how much energy the buyers show as the day winds down. Fear of being left out has been the driving force in this market for many years, and that is what we want to see to signal that a new uptrend may start to develop.
It is too early to call a low, but two big reversals in two days are helpful.
Oct. 16, 2014 | 10:44 AM EDT
Encouraging Action in Small-Caps
- I will be looking for more entries as things develop.
Market players are well trained to buy gap down opens. They did yesterday and again this morning.
The big difference now is that those early bounces aren't holding up as well as they used to. Up until the last few weeks the tendency was to keep on running after a quick bounce, but that has shifted and now the flippers and shorts are hitting the strength and keeping things more contained.
The most impressive thing about the market is the continued outperformance by the small-cap indices. The Russell 2000 (IWM) went positive and is outperforming for the sixth day. The market started off the day with better than 10-to-1 negative breadth, but that has quickly improved and is now 1,850 gainers to 3,500 losers.
The biggest problem now is that momentum names are underperforming. We can blame Netflix (NFLX) for that even though it is likely a company-specific issue. I still like some names like Cyber-Arc Software (CYBR), Alibaba (BABA) and Twitter (TWTR), but am just tracking them right at this point.
I do see some small-caps I like. RadNet (RDNT) is my favorite, but Achillion Pharmaceuticals (ACHN), TG Therapeutics (TGTX), Pernix Therapeutics (PTX) and ZELTIQ Aesthetics (ZLTQ) are also of interest.
I'm still holding substantial cash but I've inched into a few things and will be looking for more entries as things develop. There is still substantial downside risk but the action in small-caps is encouraging.
Oct. 16, 2014 | 7:33 AM EDT
Another Bumpy Ride Is Ahead
- Right now, the mood is highly emotional.
If you want to conquer fear, do not sit home and think about it. Go out and get busy.
For over five years, the market could count on action by central bankers to bail us out. It didn't matter if we had weak economic data or that Greece, Italy and Spain were falling apart. The central bankers had a printing press and weren't afraid to use it. The old adage about not fighting the Fed was the only thing that matter.
The omnipotence of the central bankers has now started to evaporate. It began as the Fed slowly started to adopt a more hawkish stance -- but the bigger issue is that five years after the huge financial crisis that prompted all this central bank activity, we still have a lousy economy and may even fall back into recession. By any measure, it has been the worse economic recovery since the Great Depression. The central bankers have done little to help things, other than help to artificially inflate the stock market, commodities and a few other asset classes.
The sad truth is that the central bankers have done nothing over the years to help the average guy, and that is why sentiment is growing so gloomy and confidence is eroding. There is little question what is driving the current market rout. The big issue is whether or not this is the massive correction that so many have anticipated for so long.
Anyone who tells you that they know how this market action is going to play out is either lying or is delusional. Right now, the mood is highly emotional, with some panic in the year but also some interest from bargain hunters who haven't had a good pullback to buy in nearly two years.
While the indices suffered some more hits yesterday, there were a number of positives. First, we closed well off the intraday lows and had a strong finish. Second, small caps actually managed to close positive and have outperformed for the five straight days. Third, oil stocks finally bounced after a waterfall selloff.
The bad news is that the Ebola crisis continues to build. The popular media is attributing much of the market selling to Ebola, which really isn't the case but it does help to feed the negative sentiment. The other major piece of bad news is a terrible report from Netflix (NFLX), which missed its subscriber goals by a substantial amount. When you combine that with a poor report from Ebay (EBAY) and a lousy update from Wal-Mart (WMT), earnings season is looking downright bleak.
The contrarians are going to tell us that negativity is becoming extreme. They may be right, but using that to predict a market turn is nearly impossible. Many folks were hopeful that the huge dip in the DJIA yesterday was sufficient to wash out the negativity and set us up for a turn, but that prediction isn't looking too promising in the early going.
As I've been saying for a while now, the only way to deal with a market downtrend is to go mostly to cash, stay defensive and avoid trying to call a market bottom. If you have done that, then you are in good position for the current action and may actually be feeling upbeat and optimistic about the opportunities it is sure to eventually create.
While the suddenness of the change in market character is startling, it should be no big surprise that we are finally undergoing this sort of upheaval. The market has been running on the fumes of central bank action for years and at some point it was going to come to an end. The central banks haven't completely lost their potency. They can still move this market with the right news, but confidence in their ability to support the market has badly eroded.
It is ugly out there in the early going. The dip buyers are likely going to be sniffing around after the bounce we had yesterday, but the chasers have been badly burned numerous times and it is going to be tough to generate upside momentum. Buckle up and be ready for a bumpy ride.