Rev Shark: Worrying Undercurrents
12/15/2010 8:54 AM
"Leadership is action, not position."
--Donald H. McGannon
Although the major indices finished with some minor gains Tuesday, it was a troubling day. The biggest negative factor was the poor performance by stocks that have been leading the market recently. Money was obviously rotating out of these stocks and into other sectors, but no clear theme emerged and no new leadership took its place.
Strong markets will always see some key stocks leading it higher. These are the "go-to" names that institutions will jump into whenever they want to add long exposure. Apple (AAPL - commentary - Trade Now) is probably the best recent example. Others on the list, however, include names such as Priceline.com (PCLN - commentary - Trade Now), Amazon (AMZN - commentary - Trade Now), Baidu (BIDU - commentary - Trade Now), Salesforce.com (CRM - commentary - Trade Now) and F5 Networks (FFIV - commentary - Trade Now).
When these key names start to falter, as they did yesterday, we need to start watching for a change in market character. It may turn out that stocks are undergoing a shift into new leadership, or the action may signal that the market is ready to start correcting. Another possibility is that this represented nothing more than a hiccup. However, some of the breakdowns, like those in Salesforce.com and in Netflix (NFLX - commentary - Trade Now), were severe enough to raise a red flag.
We have seen somewhat better action in banks lately, so it is possible that this is group is emerging as a new leader, but banks usually can't go it alone. They need other supporting groups to join in, and nothing else is standing out at the moment.
We'll have to monitor the key leading stocks carefully today. If they don't bounce back quickly, the next step will be looking for a market correction to take hold. The uptrend in the indices is still intact, but action under the surface has been worrying lately. Breadth and volume have been mediocre for much of the recent rise, and far too many stocks are currently extended. With the leadership names showing some cracks, it is time to make sure we're thinking about some defense.
The interesting fact about the selling yesterday was that the Federal Reserve interest-rate announcement was what triggered it. There was no surprises in that news -- the Federal Open Market Committee merely said it would keep rates near zero -- but, as I have suggested, market players used it as an excuse to do some selling anyway. The market was technically vulnerable, and the Fed is always a good excuse to make a move, and that is what happened. Conditions were ripe for a "sell-the-news" reaction, no matter how benign the news actually was.
What we have to do know is see whether the bears have the ability to pressure this market a bit. They have been consistently overrun by dip-buyers lately. Still, to reiterate, if the key leadership stocks don't exhibit better action today, keep your eyes peeled for some sort of a corrective pullback.
This market has exhibited amazing resilience lately, and despite the poor action in key stocks yesterday, the major indices were still in positive territory. No serious technical damage has been done so far, notwithstanding the less-than-encouraging underlying action. If Apple, Netflix, Chipotle (CMG - commentary - Trade Now), Baidu and some cloud-computing names come roaring back, this market will look just fine. There are indications, however, that market players are looking for the exits in key names -- and, if that materializes, the market will take a turn for the worse.
At the time of publication, Rev Shark had no positions in the stocks mentioned.
