The market was run over by the ugly truck today, but the iShares Russell 2000 ETF (IWM) was close to unchanged for the week and the senior indices lost less than 1% since last Friday's close. It was a quite a roller coaster this week and we concluded it on a very sour note.
The Fed received most of the blame for the wild action, but oil, high-yield bonds, currencies and a number of other macro matters also played a role. Despite all the news flow, I believe what was really driving the action this past week were computer algorithms and other strategies designed to trade against the emotions of investors and traders. This is nothing new, but the conditions this week favored even more aggressive trading, which produced major swings.
There is obviously some technical damage done by the big reversal following the FOMC news, and the bears are backing up their views with the argument that the Fed's interest rate hike was a mistake and the market reaction shows the lack of confidence in Janet Yellen and her crew.
If you are looking for an optimistic view, there are two arguments. First is that this market has had a strong tendency toward quick reversals after suffering technical breakdowns. The reason the phrase "The market has no memory" is used so often is that the bounces tend to come out of the blue.
The other positive is that we still have the potential for seasonality to kick in. Strength to end the year is a tendency and not a certainty, but this ugly pullback may actually produce a good setup for a relief rally to conclude the year.
I'm positioned very defensively and am not anticipating anything at this point. I'll be looking to jump in some bigger-cap names like Facebook (FB), Microsoft (MSFT), Alibaba (BABA) and Google (GOOGL) at the first sign of some upside momentum, but I want to see that positive price action first.
The mood out there is quite grim, and that may be helpful, especially if more folks give up their hope for a bounce. A gap down open on Monday may be give us a repeat of what happened last Monday, but even the dip buyers may be a bit more nervous and uncertain now.
Have a great weekend. I'll see you on Monday.
Dec. 18, 2015 | 11:12 AM ET
Waiting for the Market to Signal a Turn
- · It won't bail you out if you make a mistake.
An hour into the trading day, we are hitting new intraday lows, which is not a good sign. Early bounce attempts were quite feeble, but one positive is that breadth isn't that terrible, with about 2100 gainers to 3250 losers. That shows there is a little speculative interest under the surface and explains the slight outperformance by small-caps.
I'm having some luck with small-cap names like Pacific Biosciences (PACB), Himax Technologies (HIMX) and Ohr Pharmaceutical (OHRP), but you really have to be highly selective and manage positions carefully. This market will not bail you out if you make mistakes.
There is a big crowd of folks sitting on the sidelines looking for an opportunity to play a quick bounce in the indices and the FATMAN names. When the market turns, those are the "go to" plays and there will be a quick rush the moment that there are signs that the pressure is relenting.
Technically, the indices are not in a healthy place here. There is no obvious support yet and the lows from Monday are beckoning. This is no time to be a hero with a big call. Keep it tight and play strong defense.
Dec. 18, 2015 | 7:02 AM ET
How Much Further Will the Market Dip?
- · Don't rush in to buy this gap down open, but do stay optimistic and look for good entry points.
"Hope for the Best. Expect the worst. Life is a play. We're unrehearsed."
--Mel Brooks
A delayed "sell the news" response kicked in the day after the Fed announced the rate hike -- and it was a nasty one. It was even more painful because of the immediate positive response that helped to create greater complacency.
The bulls and financial media were celebrating the "dovish hike" and praised Janet Yellen for "striking just the right tone." Market players are used to a positive response to whatever the Fed might do, so many were caught by surprise when things quickly turned ugly on Thursday. What was even worse was that selling accelerated over the course of the day, and we closed at daily lows.
Some bulls were pointing at the lower volume yesterday, but that is little comfort, as we completely gave back the prior day's gains. Volume is simply not the indicator it once was, in these days of computer-driven markets. It is supposed to be an indication of institutional interest, but that seems like a quaint, old-fashioned concept in today's market.
What is more important is the price action, and that was unquestionably poor. The issue now is how much further this market will dip before it can find some support. The most obvious technical level is the 2000 level of the S&P 500, which is where we were on Monday before the big, pre-Fed move. A retest of that level is going to receive much attention from technicians, and it is going to create a very uncertain picture.
It is not a pretty technical picture, at the moment, but the big question is whether end of the year pressures will help to prevent downside momentum from building. As I've discussed, this has been a terrible year for money managers - and individual investors, as well -- largely because of how poorly the indices have reflected overall market health. The average stock is already close to a technical bear market, but the indices have been held aloft by a small group of big caps -and they do not reflect that fact.
This sort of action makes it extremely difficult for investors to outperform benchmark indices. You had to be an exceptional stock picker and market timer to outperform, this year, and there are few that have accomplished that.
The main issue over the few days remaining in the year is whether there will be some performance chasing. If that does occur with any real enthusiasm, then we should be able to find some pockets of momentum to trade. On the other hand, this difficult market may drive some folks to close the books and call it a year. They will try for a strong start when we go back to work after the holidays, but they will be happy not to wrestle with the market beast any longer in 2015.
We are looking at a sharply lower open this morning that will fill the gap on the SPDR S&P 500 ETF (SPY) chart from last Friday and put the recent lows into play. The blame is being placed on continued pressure on oil and commodities and some big swings in Asian markets. The Fed has caused some issues with currencies, and that is what is really driving the volatility now.
As I posted on Twitter (@RevShark) prior to the Fed decision, I was looking for a spike on the Fed news and then a selloff yesterday. That played out to script, and now we have to figure out how to position from here. My game plan is not to be in any big rush to buy this gap down open. I will be looking again at the FATMAN names -- Facebook (FB), Amazon (AMZN), Tesla (TSLA), Microsoft (MSFT), Alphabet (GOOGL) and Netflix (NFLX) -- as trading vehicles when conditions for a bounce develop, but we need to see how conditions look after the open.
From a trading standpoint, this open looks like it is generating some strong emotion -- and that is a good thing. We just need to stay objective and open minded, and look for the right entries as it plays out. Stay cautious, but be optimistic about the potential.
