The entire market stumbled intraday on Monday on some meaningless news in the biotechnology sector about Bluebird Bio (BLUE). Today another drug company, Valeant Pharmaceuticals (VRX), was the catalyst for another round of selling. This time we didn't bounce back very well despite a spirited defense by the company.
In a "normal" market, this news would tend to be treated as company-specific and would not impact the broad market to any great degree, but nervousness is quite extreme right now and market players are easily scared out of the market at the first sign of trouble.
What is rather odd is that there is still pretty strong underlying support. Breadth is better than 2-to-1 negative and there is plenty of weak action in individual stocks, but a couple of big-cap names are holding up the DJIA and S&P 500.
Today was one of those days where the indices helped to cover up some very poor action in individual stocks. It was much worse than it looked, but the indices are clinging to some important support and that is keeping sentiment somewhat positive.
I've been maintaining a generally bullish bias, but the action today was troubling and I cut some exposure and raised my already large cash position. This market has simply not given us very good setups lately and the struggles today confirm the fact that there isn't any reason to be overly optimistic.
We still haven't seen any major technical damage, but the weak finish today is causing concern.
Have a good evening. I'll see you tomorrow.
Oct. 21, 2015 | 1:21PM EDT
The Bears Retreat Again
- · The action is too strong to be aggressively bearish but too weak to be highly bullish.
Once again, the bears have plenty of ammunition but are incapable of doing much with it. Weakness in the Chinese market overnight, poor earnings from Chipotle (CMG), Yahoo! (YHOO) and several others and more carnage in the biotechnology sector are all good excuses to hit the eject button but the bulls just aren't giving up.
The focus of the optimists is good earnings from the likes of GM (GM) and Boeing (BA), some takeover action in the chip sector and enough poor economic news to keep the central bankers dovish. Markets aren't sailing higher on this news, but they are holding up extremely well.
While breadth is negative due to relative weakness in small-caps, there is some bounce in oil, chips and retail. Facebook (FB) is showing relative strength but momentum names in general are just sitting and resting. There is potential for squeeze action if we can hold steady as the close approaches, but this market is not giving many indications that can generate real power.
My view is simple: Let the price action be your guide. The action is still holding up well enough to suggest that it is premature to be overly negative, but the lack of sustained momentum suggests that it is a good idea to keep some powder dry and to wait for better setups. We are in the middle zone right now where the action is too strong to be aggressively bearish but too weak to be highly bullish.
Oct. 21, 2015 | 10:18 AM EDT
What? Me Worry? The Answer Is Yes
- Momentum is limited and the potential for bad news is growing.
In view of weakness in China overnight, the gap-up U.S. open this morning was a bit surprising, but there isn't much momentum and breadth is running only around 2,500 gainers to 2,400 losers. Biotechnology has a slight bounce and chips are doing well on the takeover action in the sector. The FANG names -- Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google/Alphabet (GOOG, GOOGL) -- aren't doing much of interest.
The action feels tired and I've been selling down a few things and started a position in ProShares UltraShort S&P 500 (SDS). I'm not a grizzly, but the market needs further consolidation. The bad news continues to flow and the risk that it will be used as an excuse for more aggressive selling is high.
I'm not at all concerned about the market running away to the upside. I keep complaining about the lack of quality setups on the long side and that continues to be my main problem with the market. While we aren't in bad shape technically, the momentum is limited and the potential for bad news to matter is growing.
The longer it holds up, the more likely the bears will give up. But the buyers just don't look confident -- and that has me worried.
At the time of publication, Rev Shark was long SDS, although positions may change at any time.
Oct. 21, 2015 | 6:40 AM EDT
The Bears Have More Ammunition to Work With
- However, the price action doesn't confirm the bearish thesis.
"Don't dwell on what went wrong. Instead, focus on what to do next. Spend your energies on moving forward toward finding the answer."
The market was struggling some on Tuesday, but not enough to derail the uptrend that started following the poor September jobs news. The bears were jumping up and down and pointing at weak action in key momentum names including Action Alerts PLUS charity portfolio name Alphabet (GOOGL), electric car maker Tesla (TSLA) and Growth Seeker portfolio holding Amazon.com (AMZN), but the selling never accelerated enough to cause a major change in market character. Breadth was positive and, in the bigger scheme of things, the pullback looked like nothing more than a little healthy consolidation after a good run.
This morning the bears have more ammunition to work with and we'll see if they can make a better push this time. China stocks suffered their biggest loss since mid-September, with a 3% pullback and earnings from both Chipotle (CMG) and Yahoo! (YHOO) were disappointing.
Market players were anticipating an abysmal earnings season and that is what we are seeing. The list of disappointments is the longest we have seen in a number of years, but so far the market is treating them as company-specific rather than a symptom of a lousy economy. IBM (IBM), for example, hurt the DJIA due to its high weighting, but didn't seem to have any sympathy impact on other stocks.
CMG and YHOO are going to add to the pile of negatives that the bears have been telling us about lately, but early indications are positive. This market is staying focused on the support provided by central bankers and is not overly concerned about anything else right now. In fact, the weakness in China last night stirs up hopes of some sort of stimulus and that is why we are trading up this morning.
It is downright perverse, but what is driving this market is the same old "bad news is good news" thinking. The more negatives we have, such as the weakness in China, the more the market anticipates that central bankers will work to do more to prop up the market.
The bearish arguments out there are very logical and quite compelling, but the 800-pound gorilla is central bankers. As long as they remain dovish, it is going to be tough for the bears to dig their claws into the market.
I don't want to sound like a Pollyanna. This is certainly not an idea market. We are facing some technical overhead and, as I constantly point out, it is extremely tough to find good setups in this market. Putting money to work is very challenging, which actually is a good thing because the momentum is very limited.
If you want to find flaws and problems with this market, it is very easy to do, but the price action is not confirming the bearish thesis. Until there is a real shift in the character of the action, the bulls deserve the benefit of the doubt.