OT: IBD Uptrend under pressure

Investment Analysis Clubs Saul’s Investing Discussions
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Duh. It went that way after Friday, but we had gone from 1 distribution day (in the last 25 trading days) to 4 before that. I think we could all feel that the down days were a little bigger and more frequent before Friday. We are now at 6 dist days on the Naz and I was surprised they did not call a correction today. Looks like Dow futures are down 1000 for tomorrow, if that sticks, they have to call it.

By IBD rules, you are buying growth stocks on breakouts and you are supposed to limit losses to 7-8%, but on a day like this you can’t do that, you blink and it is too late. Put in stop losses and a true flash crash stops you out at possibly horrible prices only to see a bounce back. This is a great weakness in their approach, that and normal human weaknesses that make you voilate the rules.

But being 100% invested like Saul can also really test your mettle. Tomorrow will too.

I usually only listen to Cramer on days like this, and he is good on these days. Look for stocks that reported great earnings and were even up on Friday against the tide - look to buy this on furhter dips (e.g DATA). He points out that some of these crazy ETF and tools like the XVIX (2xInverse XIV) can cause crazy imbalances and combined with computer trading the market “breaks”. At one point the XIV went by on the ticker as down about $100 to aroud $10. That is tied to stocks in a way and can really mess with computer algorithms.

Some of the stocks from this board have done GREAT relatively speaking, here are Saul’s holdings as of end of Jan:
http://stockcharts.com/freecharts/candleglance.html?TOP:,SHO…
http://stockcharts.com/freecharts/candleglance.html?MIDD:,TL…
http://stockcharts.com/freecharts/candleglance.html?SMALL:,P…

In particular, ANET has had a great run but not much of a sell off $290 to $260 - 10%. A bet Saul sold some to buy bargains, but it held so strong it shows the big boys are not sell as much as you would think, so it looks like a great stock to own.

Shop from a high of $130 to $118, not bad. Sure it hurts, but there are a lot of stocks out there that are hurt much worse.

From the article today…

Extreme levels of fear usually are a sign of a near-term low. We’ve seen unusually low readings in the last couple of years. So the injection of fear was not unexpected. The question is where does it usually go from here?

Looking at a few dates with high fear spikes:

The flash crash on May 6, 2010: After a quick rebound, the market weakened again over the next three months before starting a powerful rally on Sept. 1, 2010.

What usually happens when a near-term bottom is made and after some choppy action, a rally of 10% or more ensues. That was the case on Aug. 24, 2015, where a mini-flash crash put an already weak market into a dive. That was the bottom of a 12.5% correction in the market. There was some choppy action for the next five weeks before a rally of over 10%.

In August 2011, fears of global recession led to a spike in the VIX. A near-term bottom was made but undercut two months later after choppy action. The market quickly rebounded and started a powerful rally into the first quarter of 2012.

On Feb. 27, 2007, Shanghai started a domino effect in world markets that dropped U.S. indexes more than 3%. The index drifted slightly lower the next couple weeks before starting a rally of more than 10%.

Most recently you had a dose of fear in a very short-lived pullback after the vote to end Britain’s membership in the European Union. The correction lasted all of two days before a powerful rebound.

Meanwhile, the put/call volume ratio, a contrarian market indicator, notched readings of 0.97 on Friday and 1.10 on Monday. When investors are buying more bearish puts than calls in the options market, readings of 1.15 or higher indicate excessive fear and have been seen near market bottoms in the past

*Remember our recent discussion on buying puts as insurance? Still worried about them being a wasting asset?

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Tuesday

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The S&P 500 fell as much as 9.7% from its peak. That’s practically the definition of a market correction, which is commonly understood to be a decline of at least 10%. The small-cap Russell 2000 did sink more than 10%.

Institutions have been unwinding some of the rich holdings earned during a strong 2017 and an even better January. But at the closing bell, the market had solid gains and was well off session lows. That’s how a lot of market bottoms begin.

Has the market indeed put in a low? Signals are mixed so far.

The Nasdaq closed back above its 50-day moving average, a good sign. But the S&P 500 remains below its own 50-day line.

The put-call volume ratio has been rising but still is not at peak levels that have marked index bottoms in the past year-plus.

The Cboe Market Volatility index, or VIX, is way above levels that have marked market bottoms. But that’s precisely one of the concerns on Wall Street. Shares of Cboe Global Markets (CBOE) plummeted Tuesday as trading was halted on several inverted volatility products. The intense volatility is causing worries about the impact on trading volume at Cboe’s Chicago Board Options Exchange.

If the market is bottoming, don’t necessarily look for a follow-through to get the market back to a confirmed uptrend. Such a signal is not likely to occur if the sell-off is of short duration. Follow-throughs — in which a major index makes a sizable gain in higher volume to confirm a rally attempt — are best used for longer corrections.

A continued rebound in the major indexes would be enough to get the market back on its feet. Also, there are reasons to believe the market is not in a full-fledged correction.

The economy is still improving. Friday’s employment report saw 200,000 jobs added in January, while the unemployment rate held at 4.1%. The IBD/TIPP Poll finds consumer confidence at a 13-year high.

S&P 500 earnings are on track for another strong quarter. FactSet says there was a rapid increase in earnings expectations for the first quarter of this year that started just after the tax bill was signed into law. Aggregate S&P 500 profit growth for Q4 is running at 13.4%.

The market had become overheated in January. The Big Picture noted that risk last week and cautioned investors to tap the brakes. A combination of a long advance and low volatility eventually bubbled over at the first sign of trouble. Inflation, valuations and other factors have contributed to the sell-off.

Another important factor is that leading stocks are weaker but there’s been no avalanche of sell signals. More than half the IBD 50 stocks are trying to find support at the 50-day line or near their latest buy points. No doubt, many others have slid below those key levels.

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2/7:
Today, the distribution count stands at a lofty six days, and the average size of these declines is 1.4%.

We have seen it at 6-7 days during the long move up, but on those cases the distribtion days were pretty small percent declines, this is very different. (Like that’s not obvious).

…
go to a daily chart and you’ll see that the large-cap benchmark turned tail after trying to rise back above the 50-day moving average Wednesday. Such resistance is not ideal. The Nasdaq composite suffered a similar negative reversal on Wednesday…

All in all, a correction at this juncture is very healthy for the long-term health of the market. A 9% decline for many of the major indexes is just what the market needed. The intensity of the sell-off was a great wake-up call. Sell signals need to be obeyed.

The Cboe Market Volatility index, or the VIX, briefly pole-vaulted over 50 on Tuesday, its biggest spike since 2011. That year, coincidentally, was the last time we saw a 20% correction in the major market indexes, including the Nasdaq and the S&P 500.

Back then, the global economic environment was totally different. The 10-year Treasury yield raced up from an intermediate-term low of 2.41% in October 2010 to as high as 3.75% by February 2011, before the Federal Reserve engaged in new strategies, including massive buys of Treasury bonds and agency mortgage-backed securities, to keep the cost of money at historic lows. But shaky finances and weak economic outlooks for Spain, Ireland, Portugal, Italy and Greece were high on investors’ radar weighed heavily on U.S. stocks.

Today, the front burner issue is whether inflation will in fact accelerate sharply enough for the Fed to go faster than initially thought to raise short-term interest rates. A sudden rise would no doubt impact the U.S. economy in terms of borrowing and real estate values. Already in 2018, homebuilders have corrected sharply en masse…

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