Skip to main content

Calling an Audible Can Save the Play

The lack of a reversal Tuesday hints at further selling.
  • Author:
  • Publish date:
Comments

When Peyton Manning steps up to the line of scrimmage, he has a play in mind. Then, he carefully surveys the defense. If he sees something he doesn't like, he 'calls an audible', changing the play via shouted instructions to his teammates. He makes any necessary adjustments on the fly.

I closed some longs recently with the intent of buying them back if and when the S&P 500 reached 1660. On Tuesday, for the first time in nearly a month, the index traded at and below that level. Despite this, I'm calling an audible. I'm changing my plan for three main reasons:

Volume -- Markets didn't just sell off Tuesday, they sold off on high volume. Overall, U.S. equity volume increased significantly on Tuesday. NASDAQ saw its volume jump by about 40%. This indicates a greater commitment on the part of sellers vs. buyers.

Price Action --Tuesday's selloff was relentless; the market opened near its highs and closed near its low. The lack of a reversal hints at further selling to come.

Distribution -- We saw heavy selling Tuesday of otherwise strong stocks on no news. Priceline.com (PCLN), which reached an all-time high last week, fell 4.18% on double its average volume. LinkedIn (LNKD), another name that was within shouting distance of its all-time high, fell 6.1% on triple its average volume. Facebook (FB) was rocked for a 6.68% loss on nearly double its average volume.

When a large swath of otherwise strong stocks is taken to the woodshed indiscriminately and simultaneously, it smacks of a large fund or funds lightening up. I'm using this morning's Yellen bounce to do the same.

Source: TradeStation

Specifically, I'm getting out of Rosetta Resources (ROSE), which we recommended on a break above 50 three weeks ago. Any stock that's risen over 10% in a weak market has done its job well, but I'm not going to press my luck when I can simply ring the register. I am kicking myself just a bit, as we could've closed ROSE with a 15% profit last week. We'll revisit this stock at a later date.

One bright spot, as far as equities are concerned, that emerged overnight was the nomination of Janet Yellen as the next Fed Chairwoman. I believe the Yellen nomination will easily pass through Congress as she is a natural to replace Bernanke and continue -- and perhaps augment -- his policies.

The Yellen nomination is generally supportive of equities, and helped foster a nice pre-market bounce today. The Yellen factor is a long-term issue, however, whereas selling by big funds -- if that is indeed what is happening -- is an immediate concern.

At the time of publication, Ponsi had no positions in stocks mentioned.