The action today was a good example of "Be careful what you wish for, you just might get it." Many market players have been hoping for some downside action so they would have an opportunity to buy at lower prices. What they didn't count on was a body slam of this magnitude. Precious metals imploded, which took down the whole commodity sector, and there was no way that money was going to rotate into other sectors when the selling was so intense.
What was different about the action today was the terrible breadth of almost five losers for each gainer, the magnitude of the losses and the lack of any bounce at all. We not only closed at the lows but selling picked up in the final hour of trading.
Every time we have had very poor action this year, we seem to shrug it off and quickly regain our footing. It has been a mistake to be too bearish too quickly, but when we have action like this you have to take defensive action just to play it safe. There is too high of a risk of further downside when it sells off like it did today.
Technically, the uptrend in the iShares Russell 2000 (IWM) is now clearly broken but the other major indices are still holding some key support. It looks quite precarious, and with price action like we had today, I'm not overly optimistic it can hold.
The goal now is to try to keep the damage to your portfolio limited. If you can avoid the work of having to make up losses, you are far ahead of the game and the first step in doing that is not to ride stocks down when the market cracks.
This was definitely a change in market character today and we need to make sure we adjust very quickly.
Have a good evening. I'll see you tomorrow.
April 15, 2013 | 2:29 PM EDT
The Shift Is On
- The market has finally undergone a change in character.
The advice I've been giving since the first of the year is to stick with the uptrend until the price action shifts and there is good reason not to. The action today definitely looks like we have finally undergone a change in market character.
We have had a couple of bad days in 2013 where it turned out to be a mistake to be too bearish too quickly, but the action today definitely has a different feel. The devastation in commodities, the meltdown in small-caps and the breadth of the selling are indications that we are undergoing a shift in the way the market is viewed.
We all knew that that market was ignoring very obvious negatives and has done so for some time. Today the negatives matters and we have to watch for pessimism to build now that we have some stuck bulls and rejuvenated bears.
What is particularly worrisome about the action today is that the dip-buyers have been totally ineffective. When we are making new intraday lows with just two hours left in the day it is a sign that the focus is on exit points rather than bottom-fishing.
If you haven't already cut back some positions, it may not be a bad idea to think about. Downside momentum has been rare in this market, but the way things are trading suggest that quite a few people are looking for a way to escape and if we do bounce, it may not last long.
Great caution is warranted at this point. Don't be in a hurry to bottom-fish.
April 15, 2013 | 10:20 AM EDT
A Bear of a Morning
- An excuse for selling is being embraced.
The big danger of the gold, oil and commodity meltdown this morning is that it will spread to the broader market. Early on, dip-buyers are spooked and standing aside. All the recent talk about liquidity now sounds questionable, as liquidity was what drove the "commodity super-cycle" for so long.
Another problem for equities is that we have long ignored bad news, but now an excuse for selling is being embraced. The old saying is that bad news doesn't matter until it matters, and now it looks like the bearish view may finally matter.
Breadth is very poor at around four losers for each gainer. Obviously, the commodity sector is leading to the downside while there is a little relative strength in drug stocks (a safe haven) and banks.
I've taken stops on positions this morning and have no interest in buying. A new intraday low just hit and many of the small-caps I'm tracking are coming in hard. I have some names on my watch list but the potential for further downside is high. It is a good time to work on a shopping list, but too early to do any buying.
April 15, 2013 | 8:15 AM EDT
As Goes Gold
- Will the broader market follow gold's decline and roll over?
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head. --Warren Buffett
Weaker-than-expected economic news out of China is causing pressure this morning, but what is really causing consternation is the steep dive in gold and other commodities.
Gold, oil and almost everything mining related have been under considerable pressure lately, but the selling is picking up momentum this morning as at least one analyst at Citi declares the "commodity super-cycle" is dead.
The weakness is attributed to both the slowdown in China and to concerns that central bankers, the Fed in particular, will not continue to flood the market with liquidity. Much of the rise in the commodity sector is due to cheap cash that has found it quite profitable to buy oil, gold and commodities, even though economic demand (other than from China and some emerging economies) has not been robust.
I'll let others dissect exactly what is going on with gold and commodities. As a momentum trader, the group has been in a downtrend for a while and has not had any appeal. The bigger question is whether the broader market is going to follow along and roll over the way gold and commodities are. Many of the same arguments can apply to equities but, so far, they have been Teflon.
Last week I commented that the action in equities is indeed manipulated and artificial. The economic news has not been positive lately but there is too much cash out there and it has been flowing into stocks. In fact, the weakness in gold and commodities may have helped to bolster equities, as that is still looking for a place to go.
My advice for quite a while has been not to anticipate a market top and wait for real weakness before becoming bearish. While there have been plenty of reasons to be skeptical about this market it has continued to trend higher. There has been some relative weakness in small-caps lately and the action has narrowed, which is a concern, but the trend has remained strong overall and there has not been any major technical damage. Until this market has a couple of weak closes and sees some distribution, the bulls still have the edge.
It is going to be particularly interesting this morning to see how we handle a gap-down open. Weakness on Monday morning almost always attracts dip-buyers but the breakdown in gold, oil and commodities is a new development we haven't seen before, which may cause increased uncertainty among buyers who so blithely buy any weakness.
Don't forget that major earnings reports start to roll in this week and that usually produces a theme. With numerous signs of economic weakening in the broader economy, you have to wonder if we will start seeing confirmation of that slowdown in company reports. Management may find it convenient to lower expectations but blame the weakening economy.
There are plenty of potential catalysts for a market turn but none have mattered so far. With commodity weakness this morning and earnings season upon us, the risk of a market turn is expanding.