After weeks and weeks of gains, the stock market finally put an end to the never-ending uptrend with all indexes falling heavy across the board. The losses had commentators everywhere scrambling with reasons for the losses. Some blamed oil, some blamed soft sales at WMT. However, common sense tells us that stocks were bound to have this day sooner or later as this uptrend kept going and going and going.
At the close, the SP 600 led the way to the downside with a 2.3% swoon, the Nasdaq followed closely behind with a 2.2% thrashing, the SP 500 lost 1.4%, and the DJIA lost 1.3%. Worse news comes from leading indexes. The IBD 85-85 index fell 2.6% and the IBD 100 fell 2.7%, leading the market to the downside. The opposite of what you want to see in a pullback.
Volume was higher on the NYSE and the Nasdaq by over 200%. So clearly this was a distribution day. If you do not want to compare it to Friday's shortened session, then we can compare it to last week. Pick Monday, Tuesday, or Wednesday; volume was higher today than any of those days. Clearly a distribution day. That marks the third distribution day on the Nasdaq and the SP 500 in four weeks. Definitely, a time to be cautious in the market.
Breadth was horrible with decliners beating advancers on both exchanges by a 4-to-1 margin. It was not pretty.
There were a lot of wild emotions today in the market. I witnessed it in the chatrooms that I monitor and I can see it on the 15% jump in the VIX. However, most of my individual stock holdings pulled back on what appeared to be normal to somewhat above average trade. The losses were not that great in the majority of my top holdings and there doesn't appear much to be worried about yet.
In saying that, however, we have to respect that the market is still very overbought and we have been going almost straight up without a pause. So further weakness should almost be expected. I would be stunned if we did not pull back at least 5% (another 2.5% at least). Markets can not keep going up week after week forever. They have to pause and stair-step up or else you end up with days like today. Big giant one day swoons.
I have seen so many of these in my life that days like today don't even phase me. Also what I have noticed is that these big one day selloffs happen more in bull markets than they do in bear markets. Bear markets seem to start vicious (during a bull phase) then morph into a slow death. Same thing with the largest up days in the stock market. Those days normally happen during bear markets.
Why does this happen? Because in trending markets, traders can take the trends to such an extreme that the "rubber band" breaks and snaps back hard. I do not have the facts in front of me but I bet if you go looking for the top ten up days in the market you will see that most of them happend during downtrends and visa versa with the top ten down days.
So today's pullback should not have you scared out of all your bull holdings. This is normal in bull marekts. It is if we start to get a few more distribution days with a lot of leading stocks breaking down. If leading stocks and MY stocks start selling off, breaking support, and throwing up sell signals, then I know it is time to leave and the market is going to get weak.
As of now, I do not have that. The stocks I am selling or getting rid of are not the best of the best. Heck, stocks like HRZ don't even pullback (DO NOT BUY HRZ NOW; TOO EXTENDED). The good stocks are all holding up and telling me to hold on. For all we know this could be all the selling there is. We could gap up and be off to the races again tomorrow. Won't you feel silly if you sold your shares simply because emotions got the best of you.
Speaking of emotions. If you are a bull, don't act like that this is just "a normal" pullback. You should be preparing yourself for a selloff and have a plan ready in case you are wrong. Bears, don't get too cocky thinking this is the beginning of a big selloff. You should be worried about being wrong AGAIN and having stocks run hard against your positions, in case you are wrong. Now is not the time to have a married conviction to a certain direction in this market. Everyone should be on guard.
I hope you didn't get too burned by the days action. Aloha and I will see you at Investors Paradise.
New Swing Speculative Longs: ECGI SWAT NRGP -- for more info on longs, go to IP.
Adding To Current Holdings: AOI
New Swing Shorts: HCBK HLTH ELP
Longs Up On The Day (low vol non-IBD excluded): HRZ-65 WGA-33 IGLD ININ SUAI SQM AOI ACGL LWAY TRBN AXTI CKSW AZK LNET PLB TSG MNG BUF GENT MALL RMKR GOT OME
Stocks On Radar Screen: DLB GMRK SVI GNLB GOAM
Completely Cut Your Losses/Take All Your Profits: EROC RSTI VDSI BEBE QDEL XING ESPD
1 comment:
Hi mate, just a quick note - I noticed you mentioned in your blog (and I should be posting on IB but at work) the markets have shock days like this every now and again. It maybe worth looking at Europe, the FTSE, DAX, CAC, Eurostoxx50 etc - they've been selling off a few days now steadily and in high volume.
They maybe leading for a change or overreacting however they're trading on lower PE's etc so it maybe a good barometer. Without suggesting this will lead to anything I would just say keep an eye out. Asia is less affected but the Nikkei for instance is pretty much flat on the year vs SPX +14% or so - not as much to give back I suppose.
I'll catch you soon, hopefully online tonight.
WC
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