The market failed to rally for a fourth straight day and closed near the lows of the day. It had a similar run in October that led to a final washout the next day, but it corrected much deeper back then, especially in small-caps and momentum names.
This pullback has played out much differently than the four previous "corrections" this year. The big defensive names have corrected first and now the momentum and small-caps are catching up. The much more important difference this time is that the catalyst for the selling is something we've not seen before, which is the meltdown in the oil markets. Many market players are scratching their heads wondering why lower energy prices are a problem. What they are missing is this is about cheap capital and bubbles, not about supply and demand.
When the market is acting like this, the pundits love to focus on trying to call the bottom. The better approach is to just stay out of the way and try to protect capital as best you can. When conditions improve, there will be plenty of opportunities again. You need not time the bottom with any great precision to profit.
Right now, this market looks quite poor but I'm still optimistic that it will be a good setup for upside action into the end of the year. If we stay patient and vigilant, we should be able to time it well enough to make money.
Have a good evening. I'll see you tomorrow.
Dec. 15, 2014 | 2:10 PM EST
Oil Issues Are Normalizing the Market
- The market is not acting irrationally.
The headline on Yahoo! Finance is: "Oil's fall is 'overwhelmingly good news' for Americans." Obviously, it's not a big stretch to say that lower gas prices are good for consumers. If that was all that was involved, the market would have been flying, and it's doing just the opposite. What is the issue?
Part of it is the damage that is being done to the oil and gas sector. There are winners and losers, and the transfer of wealth doesn't occur without significant pains along the way. Ultimately, the positive will develop. But in the short term, the negatives have greater impact.
What many of the bulls are missing is that the issue really isn't lower oil prices. The big issue is that if the oil market can collapse like this, other asset classes can fall apart as well. There really hasn't been any huge change in the supply and demand for oil. There is definitely nothing to justifying a 'shellacking' of this degree.
There has always been concern that the central banks were creating asset bubbles, with all the cheap capital they kept printing. The bears have been long anticipating the eventual collapse of various markets, when that cheap capital stops flowing. The oil market is giving us a taste of what can happen, and that explains its negative impact on the overall market.
If oil can collapse like this, then way can't other commodities or equities? There is talk about supply and demand issues in oil, but that didn't happen overnight. What changed is fear that the unlimited cheap funds may not keep oil prices going ever higher.
Some pundits argue that the market is acting irrationally, but it is far from the truth. The market is simply worried that the bears may have a point about bubbles, even though they have been wrong for a very long time.
I don't think this is likely a major top, but the issues raised by the oil market, are going to remain for a while. It actually makes for a more normal market, and it sets up some trading opportunities, which is a good thing.
DEC 15, 2014 | 10:45 AM EST
A Slow Drift Downward
- This inability to hold a bounce is a change in market character.
Continued chaos in the oil market is hampering the equity market bounce this morning. The pattern has generally been for a gap like this to hold and then gain upside traction the longer the market stays in positive territory. Once a bounce starts, it doesn't fail easily, but that doesn't seem to be the case this morning.
The market is slowly drifting downward as breadth declines. Small-caps are back to flat and there's profit-taking in the biotechnology sector, which has been a safe haven recently. There isn't aggressive selling pressure but there is plenty of slippage in Alibaba (BABA) and Apple (AAPL).
This inability to hold a bounce is a change in character, and if we don't see a better effort by the dip-buyers soon, it is going to trigger more profit-taking. The essence of downtrends is failed bounces, and we are working on one right now.
I've been a heavy net seller into the strength this morning. That is my usual approach, but this market has often made you feel foolish for selling anything. This morning it is working and that may not be a good sign for the bulls.
My stock of the week, Palo Alto Networks (PANW), is acting well but in this market, it is going to be a struggle to hold if we don't see better support soon. I've made partial sales of biotechnology names Kite Pharma (KITE), Bluebird Bio (BLUE) and TG Therapeutics (TGTX) but a few others in the group, like Novavax (NVAX), still hold promise.
I like the way this market is setting up for a good rally before the end of the year, but I see no reason to be aggressive with new buys right now.
Dec. 15, 2014 | 7:45 AM EST
A Couple of Things Are Different This Time
- And you have to wonder how long the market can be repeatedly saved.
The four most expensive words in the English language are 'this time it's different.' --Sir John Templeton
Over the last few years one of the major challenges for traders is that it has been nearly impossible to produce relative strength by catching market downside. In the "old days" before the Great Recession, traders could produce substantial outperformance by periodically raising cash, or by shorting when the market weakened. The ability to time market pullbacks is what gives traders a bit of an edge -- but there simply hasn't been much of an opportunity for this in recent years.
The dilemma that traders have faced has been that, as soon as it has appeared as if the market would gain some downside momentum, it has seemed to immediately rebound, and these rebounds tend to be V-shaped bounces. Traders that look for failed bounce or overhead resistance are surprised when the market totally ignores any and all negatives and recovers as if there isn't a worry in the world.
As we kick off the week, the big issue is whether it is different this time. As the old saying goes, that tends to be one of the most costly questions in the market, but you have to wonder how long this market can be saved over and over again by central bankers and their endless supply of cheap cash.
A couple things are different this time. First and foremost, the chaos in the oil market is unlike anything we've seen since the market meltdown in 2008 and 2009. The bulls are shrugging it off and telling us that low oil prices are going to be a boom. The market is just a bit confused as this massive rotation plays out, but ultimately there are going to be some big winners among stocks driven by consumer spending.
The bears' take on oil is that this is the canary in the coal mine. The massive commodity and asset bubble created by the central bankers and endless quantitative easing are going to end very badly, and the oil market is a good illustration of how quickly and severely things can collapse once they begin to unwind. The danger doesn't lie in lower oil prices but, rather, in the potential that other asset groups will begin to suffer the same fate.
It is inevitable that this market will undergo a very ugly correction at some point, but the weakness of the economy, the low level of inflation and continued central-bank intervention have been delaying any significant upheaval. Yesterday controversial economist Paul Krugman stated that he doesn't believe the Federal Reserve will raise interest rates on U.S. Treasuries in 2015 despite the broad consensus, which is looking for rate hikes to kick in midyear.
The irony of this market for quite some time has been that the pervasive economic weakness has been one of the biggest drivers, and it doesn't look as if that will be changing soon. One of the arguments has been that oil prices wouldn't be able to fall like this in a strong economy. Lower oil is just another form or quantitative easing, and while it is causing some confusion now, it will ultimately be beneficial to the markets.
The bulls are working on a good-sized bounce this morning as they focus on positive seasonality and friendly central bankers. Oil has caused some issues, but there are plenty of bulls looking for a positive spin. In view of how quickly and how often this market has come back from brief scares, you can bet that there are plenty of dip buyers worried this market may run away from them once again.
The bears have their fingers crossed that oil is going to be the issue that finally shifts the character of this market, but hopes like those have been dashed many times in the last few years. With just two weeks left in the year to rack up some performance, the bulls are going to be pushing hard.
