The ability of this market to quickly bounce back from a gap down open is quite impressive. But today, the relative performance of small-caps was particularly impressive. While the DJIA and S&P 500 stayed in negative territory, the Russell 2000 went from down 1% to up 1.5%. It was a remarkable show strength by the small-caps, which have been lagging all year.
The big question is whether the weakness this morning was just another one of those momentary drops that cause great frustration for underinvested bulls who didn't move fast enough to buy the early weakness. Typically, the market just keeps on running after a quick recovery like this as the bulls have no choice but to chase if they want to put money to work.
As I discussed this morning, the bulls are very confident that seasonality and performance anxiety will keep this market running into the end of the year. That complacency is a bit disconcerting but in view of how the market roared back today, it is understandable.
There were a lot of folks rooting for a market pullback so they could buy some stocks at lower prices. They wasted no time in doing just that but it sure didn't end up being much of a selloff. While the folks who are riding this market are quite pleased, the traders who like to see some swings are still hungry for more.
Have a good evening. I'll see you tomorrow.
Dec. 9, 2014 | 13:24 PM EST
Underlying Support Showing Its Strength
- Today's action likely reflects the need for relative performance.
The bounce following the gap down open wasn't as quick as it has tended to be lately, but it sure is steady and that is much healthier. It really is amazing to see the strength of the underlying support. The buyers are determined to pounce on any pullback, which is most likely a function of the great need for relative performance. Money managers have had a lousy year and the best way to play catch-up is to jump on any downside and ride a bounce.
Casual market observers probably don't realize how difficult this market has been for money managers. The indices have not reflected overall market action very well. A few big caps have driven the Dow Jones Industrial Average and S&P 500 while the great majority of stocks have done very little this year.
Not only have individual stocks been quite narrow but the market provides very little opportunity for the aggressive traders who buy dips and sell rips. There are virtually no dips and if you sell the rips you never have an opportunity to buy back lower.
The action today is largely a function of how frustrated many traders have been this year. When we do finally have a decent dip they jumped in and stay with it. They have learned you have to buy dips very quickly and if you flip you end up on the sidelines while the market keeps running without you.
I'll be looking for some buys into the close. The way this market has come back today is, to use a word greatly overused by traders, "impressive."
Dec. 09, 2014 | 10:46 AM EST
This Pullback May Well Be Different
- Don't simply assume it'll be similar to the others.
We're looking at the automatic dip-buying reaction to the market's gap-down open, but the buyers aren't as confident as they usually are. The news flow isn't quite as easy to ignore this time, and the 5% hit at the Shanghai Composite is a reminder how quickly downside action can develop.
Breadth is off the early lows, but is still running at 1600 gainers to 4000 decliners. My momentum screens are almost 100% red, but small-cap stocks have bounced and oils are seeing some bottom-fishing action. In other words, the selling isn't panicky, and there are still underlying bids. Alibaba (BABA), for example, bounced perfectly off its 50-day simple moving average.
I've been lugging a big slug of cash since the hit the market took last Monday, so I'm not making any sales at all today. If you have more inventory than you would like, just set your stop-loss levels and unload a few things as technical support levels fall. It is generally a mistake to sell into an opening gap-down move, but you can see traders lighten up again as the market starts to roll over.
I've nibbled at speculative biotechnology names bluebird bio (BLUE) and Kite Pharma (KITE) and haven't done much else. I'm tempted to nibble at some of the oil master limited partnerships (MLPs), but these shares are in free fall and entries have to be made very slowly.
So far, the dip-buying action is not nearly as aggressive as what we've seen over the last month or so, and that is the key to this market. If the market starts to take out early lows, that will constitute a change in character that will demand even more aggressive defensive action. Don't be too quick to assume this pullback will be like all the others.
Dec. 9, 2014 | 8:18 AM EST
Underlying Support Remains Strong
- But the selling pressure is building.
That which the fountain sends forth returns again to the fountain. --Henry Wadsworth Longfellow
One thing market players haven't been worried about recently is downside momentum. In fact, any and all weakness since mid-October has been quickly gobbled up as underinvested bulls -- who don't like to chase stocks -- scramble to put money to work.
On Monday, we saw another one of those days of selling where the action under the surface was worse than what the senior indices reflected, but no one seemed too worried about it. After all, it's the best time of the year seasonally. Performance anxiety is running high and the bears have just been downright ridiculous in their efforts to fight this market. If you are a contrarian, you might argue that the mood is a bit too complacent but when was the last time that has worked?
At the moment, we are seeing follow-through to the downside. The main culprits are the oil market, which is in complete disarray, and China which cracked down on using debt as collateral with some complex moves. That caused the biggest drop in China stocks since 2009, as the Shanghai market plunged 5.4%. To put that in context, this would be equivalent to a drop of 964 points in the DJIA.
What is interesting is how central bankers in China are concerned that talk about quantitative easing and other forms of monetary policy will create too much speculative action in the stock market. In the U.S. and Europe the central bankers seem motivated to increase the level of speculation out of hope that it will spill over to other parts other economy. That hasn't worked very well but it has been the foundation for the cheap money that keeps the market running.
In addition to the issues in China, well known Fed mouthpiece Jon Hilsenrath wrote in the Wall Street Journal that the Fed is likely to drop the 'considerable time' phrase in its next policy statement. That will help to set the stage for the rate hikes that are expected to start to occur around the middle of 2015.
While these rate hikes are well anticipated, the market has not had much reaction to them yet. Part of the reason is that the weak economies in Europe and Asia and the quantitative easing by central banks elsewhere has helped to offset the more hawkish Fed. There hasn't been any need to worry too much since the rest of the world is doing so badly and that is keeping rates low.
So, the bears have some negatives to work with this morning. The chaos in the oil markets, the tightening in China and the potential of a more hawkish Fed. Typically the bears have not been able to do a thing with these negatives and you can you already see the dip buyers lining up to try to catch a bounce this morning.
The biggest danger right now is that the bulls are still extremely confident. Many of them don't believe it is possible for this market to correct at all. If a downtrend does start to take hold, these die-hard bulls could help to feed it when they realize markets do move in both directions.
A negative open is shaping up but it is pretty mild so far. The underlying support remains strong, but the selling pressure is building.
