The high level of volatility last week has convinced many market players that this time it's different and the likelihood that the market will continue to struggle is quite high. The high volatility, the inability to hold on to gains produced by bounces and the technical damage that was done are good reasons for caution, but this market has a history of finding its footing just when it seems that it is about to succumb to the many negatives the bears have preached for so long.
This morning there is some bounce action as IBM Corp. (IBM) agrees to acquire Red Hat Inc. (RHT) at an enormous 63% premium, Chancellor Angela Merkel says she'll resign as her party's head and German stocks bounce, Brazil elects a new president and China continues to look for ways to prop up its ailing market.
The thing that has been most notable about the market action recently is the inability of bounces to hold. Last week there were three sizable gaps to the downside and each one was bought, but in only two cases was the bounce strong enough to turn the S&P 500 green at the close.
Not that long ago I was writing about the markets inclination to produce V-shaped bounces following dips. It never made much sense from a technical standpoint because usually dips impact sentiment and cause some trapped bulls to want to escape. Typically the market will go through a number of gyrations as it tries to find a bottom and bounces will fail several times.
We are seeing more typical bounce action this time, but many in the market are not accustomed to seeing so many failed bounces. They are trapped every time they think that maybe a low will hold, which then helps to accentuate the selling when the action falters again.
There is another bounce occurring this morning that creates an interesting dynamic. In a poor market this sort of strength is likely to be faded and that inclination is probably even stronger after the three failed bounce tries last week. However, there is some positive news for the market to ponder and the buying isn't at all euphoric. The mood seems more hopeful than positive and that may help to build some support.
My primary focus right now is watching for better individual stock picking to evolve. The market has been dominated by big macro moves in which most stocks move in tandem. There has been little effort to sort out "good" stocks from "bad," but there were some minor signs of more focus on individual stocks last Friday. For example, biotechnology, which has been one of the worst sectors recently, finally showed some interest. Good results from Esperion Therapeutics Inc. (ESPR) may help the group.
There is much talk that IBM is overpaying for Red Hat, but this deal is a net positive for the market. There will be some positive sympathy in software and cloud stocks and it is harder to make bearish valuation arguments with that sort of premium even though many believe IBM management is crazy. IBM is down about $5 in the early going and will impact the Dow Jones Industrial Average (DJIA), but the rest of the market should see a boost.
My game plan here is to respect the fact that the major indices are still undergoing a correction and the overall trend is down, but I'm going to look for some index trades as the action develops and will focus on individual stock picking as the market starts to shift to a bargain-hunting mode. There are some better charts developing, but there continue to be very few. That can change fast and we will need to stay vigilant.