We kicked off the day with some standard dip buying, but the buyers didn't stick around for long. The market reversed after a couple hours and it was pretty steady selling pressure the rest of the day. Breadth was poor with just 1,700 gainers to 2,250 decliners, but we still had over 370 new highs, most of which were biotechnology related.
The real ugliness today was in the oil sector, which trapped the bottom fishers from last week and caused some panic selling. It is another good example of something I've often written about, which is that momentum, in either direction, can continue much longer than seems reasonable.
Overall, the damage to the major indices was fairly minimal. We have a technical distribution day and the uptrend line from the October lows is suffering some stress, but many bulls will declare this action as healthy and necessary if we want to see a good conclusion to the year.
My major concern right now is to watch for another "stealth" correction to form. Every correction this year was started with minimal impact to the senior indices while small-caps and momentum names turned downward very fast. If you weren't aggressive in playing defense you suffered some quick losses. On the other hand, this market has roared back from similar pullbacks so many times that most bulls aren't very worried.
The key is to stay disciplined, honor your stops and protect gains. If this selling picks up steam that is what will protect you.
Have a good evening. I'll see you tomorrow.
Dec. 08, 2014 | 1:32 PM EST
Intraday Reversal Causing Mild Concern
- At this point, though, it is just run-of-the-mill selling.
Market players haven't had much to worry about much lately, but today's intraday reversal is causing some mild concern. Typically, this market bounces back from any and all pullbacks, so many folks scoff at the idea that we could see any downside momentum. However, the sluggishness of the upside of late has likely caused some profit-taking to kick in at the first sign of trouble.
There are two big themes at work in this market right now. First is performance anxiety. Many money managers are very anxious to make up some relative performance and are pressing long positions to do so. However, they don't want to lag even more, so they are going to quickly hit the eject button if positions don't perform.
The other big theme is the high level of complacency. I'm not a fan of trying to use emotions like this as contrary indicators, but there are so many folks out there right now who believe it is nearly impossible for this market to sink that you have to wonder what will happen if we do weaken. The market beast does not like to be taken for granted. Yes, we do tend to have positive seasonality in December, but it's a tendency, not a certainty, and we can have a bumpy ride along the way.
The dip buyers have had such great success for so long that it is very unlikely the market suddenly falls apart. Downtrends are a function of failed bounces and we haven't even had one yet. It is often said that tops are a process, and if that is so, this process has barely even started. That doesn't mean you don't want to protect positions, but at this point it is probably a waste of time to anticipate a sudden collapse.
Manage your stops on individual positions and you should be fine for now. At this point, it is just run-of-the-mill selling.
Dec. 08, 2014 | 10:28 AM EST
Tempted by a Chinese Broker
- But the big challenge continues to be putting money to work.
We have another fine example this morning of automatic dip-buying by the bulls. There were a few good fundamental reasons for a soft open, but as soon as the bulls see red, they start hitting the buy buttons. Biotechnology is leading with some help from the big buyout of Cubist (CBST) by Merck (MRK). It is stocks like Receptos (RCPT), Agios (AGIO), Esperion (ESPR) and bluebird (BLUE) that are attracting the aggressive trading money.
Breadth is running soft, with a little more than two gainers for each three losers and momentum names are mixed. Google (GOOGL) and Facebook (FB) are bouncing a bit and that is helping the action, but names like Alibaba (BABA), Amazon (AMZN), Tesla (TSLA) and Twitter (TWTR) are still slipping, and that is a problem.
My top trade right now is China Finance Online (JRJC), which is benefiting from the trading surge that is taking place in China. Noah (NOAH) ran big on that theme last week, and now it looks like JRJC, which is a China-based broker, is being discovered. I don't have much else on my radar at the moment and that is frustrating.
The big challenge of this market continues to be putting money to work. We have had this very strong underlying support but rather limited upside progress. We haven't any big positive bars in the senior indices, but it has been almost all green. While it may be tempting to try to call a top in this market, there is already a huge pile of wounded bears who have paid a heavy price for their anticipation.
Dec. 08, 2014 | 7:30 AM EDT
We Need to Find an Edge
- You have to stick with the market if everyone else does.
"I am a master of logic and a powerfully convincing debater. In fact, against my better judgment, I can talk myself out of doing anything."
Are there any good reasons to worry about this market? There always are reasons to worry if you are so inclined, but the big question is whether or not those worries will matter.
As usual, the bears have a slew of good arguments for why the market is about to top. On Friday, the argument was that the better-than-expected jobs news means that interest rate hikes were coming sooner rather than later. Banks rallied on the potential of higher rates and the dollar strengthened as well, but the overall market was close to flat.
While the bears argue that economic strength in the US is a negative, they tell us the weakness in Europe, Asia and the oil markets is also a negative. The bears may have forgotten how weak economic growth results in aggressive quantitative easing form central bankers, which is one of the reasons the market held up so well this past week as the ECB mumbled about how it was going to start a bond-buying program soon.
The decline in oil is being spun as a major negative by the bears as well. The argument is that it's a function of poor economic growth and that the cancelation of drilling plans and capital expenditures will be a negative. The decrease in gas prices and the resulting increase in consumer purchasing power are being ignored.
If you want to make a bearish argument, it is not hard to do. The fact that the market has not had any notable downside since mid-October only makes it easier to argue that some ugly is lurking.
As usual, the bulls shrug and point out some obvious facts. First and foremost, money managers are performing poorly this year; their big hope is to try to make up some relative performance before the end of the year. They only have three weeks left, and the way they try to catch up is by buying rather than by selling.
The bulls are also confident that seasonality will continue to favor them. We all know that this is the strongest time of the year for stocks -- and that is self-fulfilling to some degree. You have to stick with the market if everyone else is sticking with it.
The bull and bear arguments aren't anything new at this point. There are always very astute and compelling rationales for both sides, which is what makes a market. What we need to do is find an edge, and the only edge right now is staying intently focused on the price action.
While the price action has been very steady, it has been a slow grind for a long time. We have not seen an accumulation day in the Nasdaq or S&P500 with a gain of more than 1% in over five weeks. There is no aggressive, big-volume buying taking place. Usually in a strong uptrend we will see evidence of the big buyers in the market in the form of volume. In this market, the action is extremely lopsided but there are no signs that it's institutions driving us. It looks more like computer-driven action aided by widespread performance anxiety.
This lack of aggressive buying is also reflected in leadership. In the technology sector none of the usual big cap names, other than Apple (AAPL), are doing much. Stocks like Google (GOOGL), Facebook (FB) and Amazon (AMZN) are trading poorly while leadership is a very mixed bag with stocks like Starbucks (SBUX), Goldman Sachs (GS) and Whirlpool (WHR) hitting new highs.
The dilemma is that while the upside progress of the market has been limited, there isn't any downside action. The folks who were quick to sell last Monday found themselves on the wrong side of the action the rest of the week. While the long side may not be that easy, it is definitely more profitable than the short side.
We have a bit of softness to start off the week again, as economic concerns about the worldwide economy swirl, but the potential for higher interest rates in the U.S. takes hold. The bears keep hoping that a correction is starting, but the underlying support of this market has yet to show any cracks.