Despite the sizeable gains today, the senior indices still lost ground this week. Today's bounce helped, but the S&P 500 is still solidly below its 200-day simple moving average, and the downtrend is firmly in place.
What was most interesting this week was the outperformance by small-cap stocks. Small-caps lagged a bit today, but for the week, the iShares Russell 2000 ETF (IWM) gained about 2.7%. Small-caps led this market down, and I have to wonder if they can lead us back up again.
Market players have grown used to the market improving quite quickly, once it starts to act better. But volatility has certainly picked up recently, and there seems to be enough uncertainty for it to continue. The V-shaped bounce died a painful death over the last month or so, and it isn't likely to emerge again without more central bank support.
Over the next two weeks, the great bulk of key earnings reports will be issued. So far, earnings have not been a positive catalyst. Google (GOOGL), for example, acted quite poorly after it managed a positive open on its mediocre numbers. Next week, Apple (AAPL) will set the tone, when it reports on Monday afternoon.
Overall, the market managed an oversold bounce, after very intense selling. That is the first step toward better health, but we still have to wait for more positives to emerge. These counter-trend bounces can make for good trading, but you can't be too trusting at this juncture. The risk of a retest of the lows is still quite high. It is premature to load up long positions at this point.
Have a great weekend. I'll see you on Monday.
OCT 17, 2014 | 10:30 AM EDT
Take Gains While You Can
- If the action continues, you can always buy again.
On Wednesday and Thursday the big gap-down opens were quickly reversed, which raised the question of whether today's big gap-up open would reverse. For a long time, strong opens tended to hold up well, but the character of this market has shifted lately and the potential for a reversal is much higher.
If you are a prudent trader, you have little choice but to do some selling into an open like this if you have some gains. If the action continues, you can always buy again -- but if you don't lock in some gains into this sort of open, you are likely more hopeful than pragmatic.
Alibaba (BABA) is a good example of how I play a situation where a stock I'm holding gaps up. I've sold roughly half my position and locked in a solid gain. I believe the stock has a good chance of going higher over time, but I don't think it is going to be in a straight line. After my sale, my selling price is irrelevant, and I don't even think about rebuying higher or lower than that price. I'll either look to buy more shares on a strong finish that sets up continued momentum next week or a pullback toward support levels around $89.
The whole idea is to take a profit and reduce risk while maintaining the ability to catch strong momentum as it develops. I still have about half of my position, which will keep me focused on the stock so I don't overlook the potential. I cultivate the mindset to add as a setup develops, and that will help me to make sure I don't miss it when it moves the way I hope.
I've made a number of other partial sales this morning and I don't see much new that I want to buy. Keep in mind that the longer the market holds up, the more anxiety it will create for underinvested bulls. This is how V-shaped bounces have often started, but I am doubtful the market is going to go back up so easily this time.
Tarena International (TEDU) is a stock that was a good trade a few months and is back on my radar. The chart is poor but with stimulus announced in China this morning and strength in U.S. educational stocks like ITT Educational Services (ESI), it may garner attention again.
Oct. 17, 2014 | 7:41 AM EDT
The Same Old Song and Dance
- The promise of cheap cash is all the market really cares about.
"If you're any good at all, you know you can be better."
Worries that central bankers may no longer be as supportive took the market down the last couple of weeks. Hope that the central bankers will keep providing stimulus is taking us back up this morning.
Yesterday's bounce was primarily attributed to a non-voting member of the Fed, James Bullard. Mr. Bullard stated that the Fed should extend its bond buying program, which is schedule to end this month. He also stated that the economy is improving nicely, so it sounded rather inconsistent. But the market loves a friendly Fed, and that is all it took to reverse the action.
This morning, early indications are for some good-sized gains as overseas markets embrace the idea that central bankers will act. The hope is that the ECB will soon announce new asset-purchase programs and remove the uncertainty created by Mario Draghi a few weeks ago. Mr Draghi's unclear plans helped to cause the current selloff.
It is all about the central bankers, which shouldn't be a big surprise. The market has danced to their tune for five years now, and it isn't going to suddenly start ignoring it. There is increased skepticism about how much central bankers can actually do to improve the economy -- but the promise of cheap cash is all the market really cares about. As long as market players are comfortable it will keep flowing, then the market is going to keep on chugging along.
The big question for us to consider is whether the market can pull off another V-shaped recovery. Time and again, we have bounced right back on confidence that the central bankers would be supportive. As soon as Janet Yellen, Mario Draghi or other central bankers told us that they would be accommodative for as long as needed, the market would trend back up as if it didn't have a worry in the world.
The bears claim it is different this time and that a recovery won't come as easily. What is making it more problematic is that there are some signs of economic improvement in the US. Weekly unemployment claims were the lowest in over a decade, and there are a few other things improving as well. Most folks don't feel the recovery, which is why they question the Fed being more hawkish. But there are no signs that the Fed officials are going to listen to Bullard and delay their tapering program.
One other issue that is likely to present a hurdle to a V-shaped recovery is earnings. So far major reports from the likes of Intel (INTC), Netflix (NFLX) and Google (GOOGL) have proven disappointing. Solid earnings reports have been the underpinning of this market for a long time, but now weakness in the world-wide economy is a headwind for many companies.
A positive development the last few days has been that small-cap stocks continue to outperform. Small caps were the canary in the coalmine at the top, and now they are signaling that they are improving. It is unusual for small caps to lead off the lows, but they have corrected far deeper than the rest of the market and are starting to attract some bargain hunting.
The key right now will be whether the market holds on to the early bounce. If it is sold hard by flippers, trapped bulls and aggressive shorts, we will have a problem. But if the dip buyers start to worry about being left behind and the pullbacks are shallow, then there is a good chance we can start to work our way back up.
It is a tricky market and prudence demands taking some gains into strength if you have them. On the other hand this is starting to look like bottoming action and the hunt for long exposure is going to pick up steam.