Although the computers went a bit nuts in the early going, a couple things did develop as anticipated. First, the indices did go red for a while. I posted a stat on Friday that suggested that the probability that the indices would be negative for at least a little while was 95% and that proved to be correct.
The second theme that developed as anticipated was outperformance by the FATMAN names (FB, AMZN, TSLA, MSFT, GOOGL and NFLX), which all ended up with very strong moves and excellent relative strength. These are the obvious go-to names for a bounce in the indices. They are big, liquid, have generally good fundamentals and are institutional favorites. No one is too worried about showing any of them in their portfolios.
We ended up closing at the highs of the day, which is pretty standard behavior these days when folks are endlessly trying to catch a bounce. The idea of fear is outdated as the greater issue now is trying to anticipate when the buy programs will kick in. Fear and greed have been replaced by trying to guess how the computers are programmed.
The next big issue for this market is going to be the FOMC interest rate decision on Wednesday at 2 p.m. ET. I'll be writing quite a bit about that but I think the most important thing to keep in mind is that a rate hike isn't going to produce an automatic negative reaction. In fact, I'm more concerned about the reaction if there is a failure to hike. The market is working to discount this news and after it is out the focus, is very likely to turn to producing extra relative performance into the end of the year. With the indices down to flat, even a few points of additional performance can make a big difference.
The technical picture is still quite murky. The action today helped to relieve some of the pressure that had built up but there isn't any good reason to believe that a bottom has been formed. The Fed will be the catalyst for the next move and, given the technical picture, that could easily be lower.
Have a good evening. I'll see you all tomorrow.
Dec. 14, 2015 | 1:43 PM EST
- The key to a market like this is to find a vehicle to use so you can participate.
After some crazy computer-driven moves this morning, the buy programs finally kicked in and we have a decent market bounce off the lows. Breadth is still running very poorly with about 1900 gainers to 4000 decliners, but the FATMAN names are leading as I expected.
In a market like this, the first names that tend to be bought are the liquid big-caps that have shown recent relative strength. Facebook (FB), Amazon (AMZN), Microsoft (MSFT) and Alphabet/Google (GOOG, GOOGL) are idea candidates and are all trading in positive territory now. I named MSFT as my stock of the week because I was anticipating this dynamic to play out.
Unfortunately, in a market like this, there isn't much opportunity for individual stock picking unless you are engaged in very quick flips. The market is being driven by macro concerns and stocks are pretty much moving in tandem, with the exception of the FATMAN names.
Quite a few folks are trying to bottom-fish the oils, which is understandable, but it isn't a trade that I find appealing. I'd rather stick to something like FB and try to play the short-term volatility. Market players are always looking to catch bounces in markets like this, and the key is to find a vehicle to use so you can participate.
I do not believe that this corrective action has ended, but the relative performance in FATMAN names is exactly what I'd expect at the early stage of a turn attempt. We'll watch close and then go from there. Unfortunately, with the Fed announcement pending, we are going to have more emotion to deal with.
Dec. 14, 2015 | 10:48 AM EST
These Conditions Are Good for a Quick Bounce
- The machines are programmed to exploit changing emotions.
Given all the drama in high-yield bonds, oil, commodities and currencies, it isn't surprising that emotions are running high. That is what you'd expect, but the computers that are programmed to exploit these emotions are running amock, and we are seeing some crazy swings in the market. The moves are so fast and so random, that they are untradeable.
We opened fairly flat with even breadth, but we are now seeing downside momentum build, as market players stand aside and try to figure out what is going on here. Breadth is now better than 2 to 1 red, but there is some minor strength in solar energy and retail. The folks who continue to try to catch a low in oil are trapped once again, as commodities and semiconductors lead to the downside. Poor action in Action Alerts PLUS portfolio holding Apple (AAPL) isn't helping either.
My inclination it to respect the downtrend, but look for playable bounce in the big cap FATMAN names -- Facebook(FB), Growth Seeker portfolio holding Amazon.com (AMZN), Tesla (TSLA), Microsoft (MSFT), Alphabet (GOOGL) and Netflix (NFLX).
Take your time and don't be in a rush, but keep in mind that these conditions are good for a quick bounce as the machines shift gears. Small cap Second Sight (EYES) is on my watch list today, but individual stock picking is very dangerous in this market right now.
Dec. 14, 2015 | 8:25 AM EDT
Don't Be Too Quick to Trust Early Strength
- Individual stock picking is extremely difficult right now.
It is going to be a very eventful week and I wanted to present a few observations and comments this morning:
- If you haven't already, take a look at my column about how poor the underlying action of the market has been for so long. In many ways, the indices are simply catching up with what has already been going on. The process of the indices better reflecting the underlying action is painful and messy, but the good news is that much of the market has already corrected substantially and will likely bottom out faster than it would otherwise.
- The negative news flow about junk bonds, oil and commodities, currencies and the impending rate hike are ramping up emotions. Keep in mind that the computer programs are largely designed to exploit emotions in order to gain an edge. They will push us to the extremes in one direction and then sharply turn. That is why dip buying is often so aggressive, even when there are obvious fundamental and technical issues.
- The FOMC interest rate decision is creating a very high level of uncertainty. The big problem is that Janet Yellen and her gang have painted themselves into a corner by practically guaranteeing a rate hike. They now risk their credibility, or at least the image of being able to forecast, if they back off now. No one seems to think there is any good reason to raise rates right now, but the Fed's terrible attempt at being more transparent has created some major issues with flexibility.
- It is likely that the FATMAN names -- Action Alerts PLUS portfolio name Facebook (FB), Growth Seeker's Amazon.com (AMZN), Tesla (TSLA), Microsoft (MSFT), Alphabet (GOOGL) and Netflix (NFLX) -- will be "go to" names on bounces. Money managers will want to put capital to work quickly and buy stocks with relative strength. These names offer the best possibility for that.
- Overall chart patterns stink right now, which makes individual stock picking extremely difficult. This is a market mainly for very short term trading, as emotions evolve. Technically, the indices are now in correction mode and defense is warranted, but there should be some opportunities in increased volatility. The biggest bounces occur in the context of the worst markets.
- Early indications are positive, but statistics show that the chances that we go negative at some point today are extremely high. A gap up open this morning offers the opportunity for trapped longs to escape and shorts to reload. Don't be too quick to trust early strength.