Rev Shark: Dangerous Ground
09/24/2010 7:59 AM
Winning takes talent, to repeat takes character.
--John Wooden
On Thursday a promising morning bounce in the market turned into a disappointing afternoon failure. We have now seen three days of negative action, much worse than that reflected in the major indices, and the danger of a change in market character is growing.
The biggest disappoint at this time is that the S&P 500 has completely given back the breakout of this past Monday and closed under the 1130 breakout point. A failed breakout attempt is an indication that buying momentum has been depleted. The bulls could regroup and make another try, but the main thing we have to watch for now is a failed bounce attempt.
It is good news that the S&P 500 is still above the 200-day simple moving average at 1116 or so, but if that fails then it really starts to change the nature of the market action. I generally prefer reacting rather than anticipating market action, so I don't want to be unduly negative. However, tighter defense and shorter time frames are the way to go while the market struggles to determine whether it is at a turning point.
The reaction to economic news is particularly important now. Investor sentiment went from very bleak a few weeks ago, when a double=dip recession was the big worry, to quite positive recently. However, the reaction to news lately has not been quite so upbeat. We'll see what durable goods and new housing numbers bring today, but expectations have increased, and the risk of disappointment is higher.
One of the positives lately is that there continues to be some very aggressive speculative action in certain areas of the market. Apple (AAPL - commentary - Trade Now) is probably the most prominent example, but there have been a number of big cap movers -- among them Wal-Mart (WMT - commentary - Trade Now) and Caterpillar (CAT - commentary - Trade Now) -- that have helped the major indices outperform small-cap stocks. Also, groups such as cloud computing and storage continue to attract aggressive traders looking for action, and that is an indication that confidence is still quite solid.
I'm particularly pleased to see some pockets of momentum, as this indicates stock-picking isn't futile. Much recent discussion in the investment community has centered on the fact that all stocks, good and bad, are moving together as big investors trades baskets and ETFs on macro concerns. In The Wall Street Journal this morning, for example, an article quotes James Bianco of Bianco Research as saying, "stock picking is a dead art form. . . . Macro themes dominate the market now more than ever."
We, as individual investors and traders, can't do much about that other than to be aware that our careful stock-picking can be a waste of time. We need to make sure we use disciplined money management and systematically take gains and cut losses. Macro concerns can easily roil our portfolios, so being nimble and short-term offers some protection.
A bit of a bounce is under way. After the weak close yesterday, I'm looking for the bears to try to fade strength in the next couple days.
Meanwhile, durable-goods numbers came in at and above expectations. There isn't any major reaction so far, but the premarket bounce is holding up well so far.