We had an inkling market was oversold and due to bounce. Good bounce led by the worst of areas but good to see biotechs hold vital support while the s&p held the vital 200 day moving average. It is also good to see the transports have a strong day. But today is fed day…which means blah blah blah…maybe, possibly, could be. If the fed does raise rates, mind you, it is just 0-1/4 percent to 1/4 percent which is about as meaningful as a NY Knicks bet on getting to the playoffs. So…blah blah blah!
Yesterday, we wrote a note that after 5 straight days down, markets were getting oversold. Oversold conditions lead to bounces. One just does not know when or where the bounce will occur…but just that is is getting closer. On top of that, something else happened in the past day. After weeks and months of us telling you about all the deterioration in the market, we noticed that everyone else was joining the bandwagon yesterday. We repeat, after weeks and months of deterioration, the reporters are now finally reporting what has been going on for a while. This also has us believing a bounce is due.
But leave no doubt, markets need a goal-line stand. Many important areas have buckled. The DOW and NYSE are firmly below the 200 day moving average. Other indices are no great shakes. We now key on the 2040 S&P. A break below just worsens things. The relative strength has been the NDX/COMP. The COMP broke the 50 day yesterday with the NDX getting close. There are still a good number of glamour names acting well in this narrow market and so far, thinking this continues. But eventually, narrow is not a good thing.
Sorry about the length but we have some important things to add from our recent reports of a narrowing market.
Over the past weeks, months and in some cases, over the past year, we have been telling you to avoid all the areas of the market that had topped and went into their own private bear markets. For instance, the Oils and most commodity areas back in last August, gaming about same time, reits and utilities back in January, the transports back in March and so on. This has led us to tell you in every report that regardless of the major indices hanging near highs, fewer and fewer areas and fewer and fewer stocks were participating as the market’s leadership continued to narrow. We have also told you that the ultimate outcome of this narrowing (if things do not improve) is that eventually, underneath the weight of so much damage, the major indices would follow suit.
Unfortunately, the deterioration continues. Amazingly, with most major indices a few percent off their highs, as of the close Friday:
There were just 83 new highs on the NYSE and NASDAQ and a whopping 630 new lows. These are numbers usually found in bear markets.
Our in-depth scan of stocks now show just about 35% of all stocks in shape with a whopping 65% in downtrends.
Our in-depth scan of 200 sectors is now down to a handful of good areas.
These are not the numbers of a healthy stock market but a market in deep trouble. Notwithstanding Janet coming out with QE4 (a distinct possibility if the markets head south), it is very much time to pay attention to vital support levels for the major indices. Yellen will be yapping this week. But first:
The all-important transports remain in their own private bear market. The all-important semiconductor index has now moved into its own private bear market. The -all-important biotechs are now teetering as Biogen really coughed one up. The Dow, Nyse now trade below the longer term 200 day moving average. To make matters worse, all the other major indices have now moved below initial lines of support/moving averages. We can go on. Just know things continue to deteriorate. Shorter term, things are oversold here so maybe a bounce but would not go much further than that.
We have seen this before. We saw it at the end of 1999 and into the 1st quarter of 2000. Tons of stocks and areas were already bearish but there was still fireworks in a select few areas, namely tech, internet and a few mega-cap, low beta names. We all know what happened when that narrow list finally joined the ugly. Then there is late 1972. We were not around for the “nifty-fifty” in 1972 but we have studied it closely. A select group of names kept going while the average stock was being yonked. Eventually, the select names came in, which led to some serious ugly by the market. We are not saying the same happens. We are just saying that so far, this market is setting up the same way. There is a reason for why this happens. Big money continues to realize most of the market is a losing proposition so they continue to sell everything and buy into anything that is holding up. That narrow list keeps working so the money keeps plowing in until all the names that are working get stretched and then party over. What we are seeing is classic. All that needs to happen now is for the rest of the major indices to confirm by breaking vital support. This has not happened yet but stay tuned!
We are not kidding when we say watch Dow 17465 but much more important at 17037. The same for S&P 2040 and then more important at about 1980. Next up is the russell 2000 at 1206. We do not have to mention the Nasdaq/NDX yet as it has held up the best as the big money has flown into a few mega-cap names like Amazon and Google…but beware, the big money distributed both names off of their big gaps and cannot help but mention Apple as it had a not so thrilling reaction to the number. Simply put, a break of $119 for Apple would complete a major top for the stock. If by chance this happens, expect the market to not take kindly to it.
Of course, we couldn’t leave you without talking sentiment and time as sentiment continues to be off-the-charts too frothy and speculative…which is a bright red flag for us. For starters, margin has been skyrocketing. Margin is your best friend in bull markets but destroys when markets turn down. How about the 200 or so Biotechs brought public by the wonderful investment banks over the past 2-3 years? Only one issue…they have no sales. Remind you of anything? On top of that, there have been a massive number of IPOs, a ton of secondaries, massive insider selling, mergers at any price and do not forget the gargantuan price for private equity companies. We can go on and on. As far as time, because of central banks, we have not had a bear market since 09 and haven’t even had a 10% correction in about 3 years. In other words, way way way way overdue! In case you don’t remember, bear markets do happen.
Our biggest worry remains that central banks have done it again…created another bubble. Central banks around the globe have printed upwards of $20 trillion and have kept rates at 0% forever. In some cases, there are negative rates. This has created distortions all over the place and bubbles aplenty. This has caused a “one-sided” trade where the world feels comfy that nothing can ever go wrong. Price just does not matter! (housing anyone?) We worry that when everyone is on one side of the trade, there is only one thing left to do if things turn south. We are already starting to see some unwinding in the junk bond market. We have told you many times that junk and corporate bonds are about as distorted as anything out there. Central banks forced savers to buy income at ridiculous prices, which means ridiculous yields. The simple problem is that you can no longer make a decent return safely. Before Bernanke got his slimey hands on interest rates, you could buy 3-5 year treasuries and get 6%. You could have both safety and income. No more!
Notwithstanding Yellen going back to do the maniacal Bernanke dance, you continue to be put on alert!
Has Amazon finally turned the earnings corner? For years, the question has been the costs to grow. For years, the company would continue to report losses while the stock would continue higher. We may be at an inflection point? Time will tell!
Careful about paying to much attention to the fireworks…underneath the surface remains very interesting.
The socialism just worsens. Rules, regulations, taxes, fees, mandates…
As we write this:
NEW YEARLY HIGHS ON THE NYSE AND NASDAQ- 144
NEW YEARLY LOWS ON THE NYSE AND NASDAQ- 420
Stunning to watch many having fits over Apple being down 6-7% this morning. Do they not realize it is just back to where it was after the recent romp to the upside? Living by the laws of the market, unless the stock has a strong reversal today, it just goes back into the trading range it has been in since February. That’s all. The last primary breakout was at $120…which just held on July 9. A break below would violate the 6 month trading range…and that’s when one should get more worried. If there is one issue that sticks out for us with the stock, it is that everyone on this earth (ok, almost everyone) owns the stock. When everyone owns a stock and things turn south, there is only one thing left to do. We keep watching because in our eyes, it is the most over-owned stock in history and has a large effect on the psychi of the market!
Since the NDX has been leading, we now get to see how ugly it can get off of Apple and also Microsoft, who is also coughing one up.
Most of the rest of the market is blah!
More big-cap tech as the NDX outshining the rest by miles. Somehow, we expect this to continue as money piles into a narrow group of names.
We were asked a good question. Why are all these big growth names soaring right before earnings? Who would take such a chance? Answer…no clue. For sure, AMZN, FB, AAPL and others getting a big bid with no let up. But to try and figure out who and try to figure out why takes away from the fact they are moving. If one wants to delve into buying right before earnings, have fun. We just don’t believe there is a great edge in guessing what a reaction will be.
Commodities continue to croak but have to let you know, the selling now feels a little panicky…which often leads to reaction lows. Time will tell. No matter what, the trend is still yuck!
IBM continues to cough it up. Another bad quarter with the stock acting accordingly. We have been bearish on IBM for a long time…and especially bearish on how they report their earnings.
50-60% of the market still aint having it.
And you wanted to see a lot of changes because of the NDX and to a lesser extent, the NASDAQ flying into new highs? We understand but after doing a big scan this weekend, not much has changed. Of course, the obvious is that some mega-cap, tech-heavy, nasdaq/ndx influence stocks are going en fuego on earnings and a few right before earnings come out. Be careful! Be careful about those who are telling you all this is bearish and that the market is narrow and that this reminds them of 1999 and a crash is coming and this, that and the other thing. The play is to just stick with what is in front of us and that is:
Amazingly, 60% of the market remains in poor shape while these big names are on the move. But don’t get it into your head one way or another what will happen. For months and in some cases, over a year, we have been guiding you away from the many bearish areas that have been in downtrends…with many still in downtrends. Just stick with what is working as the good keeps getting gooder in areas such as biotech, banking, regional banks, oil refining (the rest of oil remains extremely bearish),restaurants, cruise lines, retail-(auto parts,drug stores,internet), s&ls and those big cap names…which are:
Netflix…another big gap off of a 63% drop in earnings.
Google-as the new cfo is controlling costs.
Amazon…which has not reported yet but is slated to report a loss.
Apple…which looked dead a week ago is now back into the upper range with earnings soon.
Tesla…coming on again.
Facebook…in sympathy with Google.
And of course, the biotechs continue to help the nasdaq/ndx as the nonsense continues. We found 2 more names come public this week with no sales. There are now more than 150 public biotech names with no sales. That will end well.
Again, just keep in mind with all the fireworks you are seeing, there still remain a lot that is wrong…but that should not keep you from playing the good as the tape remains split. May be there will be a day where all the divergences come back to haunt things. It just has not happened yet. Thousands more earning’s reports in the next 2 weeks. Stay tuned.
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Amazon, Netflix, Google…the place to be though Amazon has not reported yet. Apple has not reported yet. Big biotech also. Despite the divergences…that still stand, these big names are doing heavy lifting for the NDX. We are big believers in major gaps on earnings and will see where they decide to take them. Prayers for those who died as well as the families in Tennessee. I had better stop writing or I may say something I shouldn’t say!