Brutal Stock Market Reversal to Test the August Lows

Brutal Stock Market Reversal to Test the August LowsThe reflex rally off the mid afternoon lows from Monday lasted less than 48 hours.

We’d barely begun to debate whether this was a merely a “dead cat bounce” or possibly the beginning of a base building rally toward some midpoint resistance level from the recent sell off.

Mr. Market settled that for us in definitive fashion Wednesday as stocks were sold from bell to bell, leaving the S&P 500 and NASDAQ barely above their closing lows from last fall.  The debate has now been recast to a question of:

How long will the correction last? or Is this the beginning of a cyclical Bear Market?

Wednesday Recap: The only two winning trades on Wednesday were to:  1) take the day off…..I was forced into this option through some hideous scheduling from weeks ago of garden variety life maintenance issues, or 2) sell everything on the opening, go to an early lunch and the Wednesday matinee so you won’t be tempted to buy anything on the way down.

But seriously,  the only place to hide among Wednesday’s carnage, and so far this year,  was in the Electric Utility stocks as the DJ Utility Average lost less than -0.1% and is fractionally in the green this year by +0.2% after being one of the worst performing sectors in 2015.

The S&P 500, -2.5% at 1890.28 settled just above the September 29 close of 1884, and not very comfortably above the 2015 closing low from August 25 of 1867.61.  The big risk of course for the S&P 500 coming into 2016 was that 8 stocks; the co called FANG gang, plus Microsoft and 3 others, contributed +4% to the Index which finished the year -0.4%

Brutal Stock Market Reversal to Test the August Lows

Mr. Market taught us in Chapter 1 that narrow leadership in a market whose performance is driven by a handful of big cap  momo stocks is rarely a good thing.  That lesson is being driven home with bold black highlighting, in Italics, and with an exclamation point early in 2016.   The FANG gang; FB -4%, AMZN -5.8%, NFLX -8.5%, and GOOG -3.5% added to the pain disproportionately on Wednesday.

But let’s not forget, It was great on the way up!!

NASDAQ -3.4% at 4526.06 is suffering from the same DNA that sparked it’s out performance each of the last 2 years.  Mega P/E valuations from uber momentum stocks that have a slightly better chance of living up to expectations than winning Powerball have taken NASDAQ from an air of invincibility to harsh reality in merely 6 weeks. On December 1, NASDAQ posted its 7ths best close ever at 5156.31, just 1.2% from its all time closing high 5 months earlier.

Now, NASDAQ is officially in correction territory, -13% below the July 20 all time closing high.  I’m a firm believer that true corrections require a minimum time in “correction territory” as well as a percentage drop from a recent high water mark. Let’s take a few collective deep breaths and let’s see where we are at the end of Q1 2016.

Just as troubling as the “correction zone” for NASDAQ is that it settled just fractionally above the lows from August and September.  A break below NASDAQ 4500 would give us the lowest closing level since the October 2014 plunge when NASDAQ posted back to back closes of 4215 and 4217.

Brutal Stock Market Reversal to Test the August Lows

Brutal Stock Market Reversal to Test the August Lows.

Deteriorating Market Internals also give us great concern that further downside lies ahead.  The advance/decline stats have given us 3 really bad days in the last 8 with Wednesday clearly the worst as decliners led advancing issues by 6 to 1 on both the NYSE and NASDAQ.  We also had 765 new 52 week lows on the NYSE.  Not quite capitulation type numbers, but eclipsed only by the 1200+ new 52 week lows from August 24 or 25.

A good benchmark was October 2014 when we had 600+ new 52 week lows on 2 consecutive days after heavy selling for close to 4 weeks.  Although we had more new lows yesterday than in Oct ‘14, we’ve only had serious selling for 8 days; albeit the first 8 trading days of a new year!!   Watch for a combination of heavy volume and a spike in new 52 week lows if we trade sharply through the August lows.

A combination of both might exhaust enough of the selling to set up a more tradable rally than what we had to start the week.

I almost forgot!!  Earnings season is upon us!! INTC reports after the close.

Dan Nathan Gives Intel’s Earnings Preview

CNBC Options Action’s Dan Nathan spoke on the show about Intel Corporation INTC ahead of the earnings report. He said that the focus of the earnings report is going to be about its 1Q guidance after the acquisition of Altera.

The options market is implying a 4.5 percent one day move and its average move over the last four quarters is 2.5 percent. He explained that a purchase of the January, this Friday expiration, 32 put and 32 call would cost $1.50. The breakeven for the trade is at $30.50 on the downside and at $33.50 on the upside. The buyer of this options structure called straddle needs a 4.5 percent move higher or lower to make money on the trade.

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