The markets took a tumble Friday after being in the green the first few hours of trading depending upon the index. The NASDAQ and Small Caps easily took the brunt of the damage with both down well over -2%.
In fact, the NASDAQ was down -110 points, or -2.6%. That’s a big move for the tech and biotech heavy index. It opened at the high and closed near the lows, not usually a good sign.
Many leading stocks, again especially the biotech, simply broke down. And it was institutional selling as volume was high.
So Yellow Alert flags are up, and your antennae should be too. But take a deep breath and relax. Don’t do anything rash just yet.
First, let’s look at the internals. Total volume was heavy, again due to institutional selling. Up Volume was 28% on the NYSE with advancing issues 35%. Actually not too bad.
But on the NASDAQ, Up Volume was only 11%, which means Down Volume was 89%. If you follow my newsletter, you know that following a 90% Down Volume day, which we narrowly missed, you normally get a rally between 2 to 7 days because selling has been exhausted.
The quality of any rally is key. If we only get a weak bounce on low volume, that will be a ‘dead cat’ bounce. It means the Mom & Pop retail investors are trying to ‘bottom fish’ and guess the short term bottom. You will also have an element of short covering by short term traders who took short positions as we got the correction.
However, if we get a rally on strong volume and broad participation by many stocks (known as positive breadth), it would imply that the pullback has run its course. The advance decline lines are still healthy, but as a bull market matures it becomes more volatile.
We are definitely in a mature bull market, but likely have months if not more, of the primary uptrend. You will have to have a plan to manage around the increased volatility.
We actually took a position in 2 broad ETFs Friday when before the markets rolled over and were still looking positive. We will closely monitor the situation to see if the markets continue to deteriorate or firm back up.
Trading at the open on Monday is usually a Fool’s Game. Give the markets a few hours to develop to see if we do, in fact, get a reversal higher.
Now I would like to address the sector rotation that Tim Reazor and I have identified here at NorAm Asset. There has been a distinct switch from biotechs into energy.
In fact, during the stock rout on Friday, both oil and gold were easily in the green. A good way to invest in rotation themes is positions in related companies.
Energy companies have been showing strength as of late. Earlier this week, we identified an energy stock, Continental Resources (CLR) with very strong growth in both earnings and revenue.
And technically, after moving somewhat sideways for months, it is on the move. CLR has formed the right side of the handle in a ‘Cup & Handle’ formation on increasing volume (see CLR 6 Mo Graph).
For this reason, we took a position in CLR on Thursday morning about an hour after the bell. We purchased the stock at $124.19 and it closed Thursday at $125.97.
Not only did it have a solid day on Thursday and after our purchase, but it closed at $126.05, or up 6 cents on Friday. Doesn’t sound like much, but when a stock is flat or up marginally when the market sells off in broad fashion, that is bucking the trend.
We will be following the evolution of managing this trade for you. This way, you will see how once we put a position on, we manage throughout the lifecycle of the investment until the sale.
For a complimentary portfolio review, e-mail me at Dan.Stewart@NorAmAsset.com and we would be happy to review positions. We can evaluate your sector exposure and individual stock risk.
The only economic report today is Consumer credit. And we have no companies reporting on the S&P 500.
We have 4 companies reporting in the broader markets. They are all listed below.
Remember to tune into The Wall Street Shuffle Saturdays on 1190 AM at 10 a.m. in DFW. We have a financial and market focus.
I hope you enjoy the show. If you have any investment questions you would like discussed on the air, just e-mail me a firstname.lastname@example.org and we will address your questions.
If you have any specific investment questions in which you would like personal advice, e-mail me at Dan.Stewart@NorAmAsset.com and I will be happy to respond.
Dan Stewart CFA®
NorAm Asset Management
Economic Reports Today:
Earnings Reports Today:
The Container Store (TCS)
Zep, Inc. (ZEP)
A. Schulman Inc. (SHLM – after market)
Team Inc. (TISI – after market)
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