It is a sea of red out there with breadth hitting close to 6 to 1 negative and over 1000 stocks hitting new 12-month lows. The Russell 2000 ETF (IWM) took out the recent lows and is now back to levels it hit in early April. The S&P 500 also broke the October lows but has a little support at the late June levels.
The big problem today is lousy earnings from 3M (MMM) and Caterpillar (CAT) . Both stocks are bellwethers for broader economic issues and both are down sharply and not bouncing so far. That is spilling over to a wide variety of other issues that have held up relatively well while groups like small caps and biotechnology have been pounded.
With so much red on the screens it may not look like it but there is some rotation taking place. Many of the individual stocks that have been under pressure for weeks are not down as much as the big cap names like CAT and MMM which are catching up today. Of course, it is tough for small caps to bounce when the major indices are creating such negative sentiment but it is encouraging to see some signs that support may start to form.
CAT has obviously been thrown into the dumpster by those that held it as it sunk into earnings. They just don't want it on the books at this point since it looks so poor. It is not a particularly expensive stocks with a trailing PE of 12 and EPS growth of around 11% in the next fiscal year, but it is highly cyclical and that is the major concern. This stock can become much cheaper if there is a major cycle turn occurring.
CAT is not a name I'd have any interest in at this point. It obviously has downside momentum and there are still questions about its valuation. If you are interested in it the best course of action is to just to stand aside and wait to see if it can find some support soon.
I see plenty of other names that I think will produce better bounces. The biotechnology sector looks particularly interesting and I'm nibbling at names like Viking (VKTX) and Amarin (AMRN) .
(3M is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells MMM? Learn more now.)
