Lessons From A Flash Crash

The last time the stock market flash crashed, I was way over extended with my call options.  I was not paying attention or did not have sufficient alerts set up.  Like many, I was riding the wave of complacency.  The market was in an uptrend and despite minor warning signs, like low volatility, investor over-confidence, and many extended stocks, I was enjoying the relaxing ride.

I lost a ton of money in one day.

This time, with the market in yet another uptrend and a rising peak tide of good sentiment, low volatility, I was mostly in cash.  I had very limited long positions with tight trailing stops and only one call option in play (NVDA}.  Purely a hype play and I sold both call options shortly after the open Friday morning for nearly a 300% gain.

My stops took care of the rest.

I made a nice little profit and managed to protect most of it too.

IBD had a very interesting and timely article regarding the VIX, you can read about it here.

Basically the VIX was at all-time lows and despite a less than favorable UK vote and the ever depressing saga of Trumpolitics, there seemed to be little to no fear in the markets.

That was when it happened.

The VIX  “flashed” an extremely bullish signal (hitting historic lows) shortly before the selloff began.

By the time it was all over the market was down a lot!  It seemed everything lost value Friday.  But then I started looking at some of my watch lists and reading daily recaps and low and behold, the financial sector was up.

With republicans pushing through the repeal of Dodd-Frank and the up-coming Fed meeting where analysts believe rates will go up, Is the tide shifting?

Again, some other timely recap articles mentioned that the financials were bucking the trend and actually showing signs of recovery.  But much of their gains were on low volume.  Other articles talked about how during a correction, certain stocks and certain sectors will hold up better than others.  When the market does recover, and start another uptrend, the new leaders of the rally are rarely the same as the old leaders.

Selected stocks from the sectors which hold up better than the rest during a correction are more likely to be the new leaders.

So the questions are . . .

Is today the beginning of the end for the bull market and the start of the bear?

Or, is it yet another flash crash to bring the high flying market back down to support trend lines?  After all, we have had three of these within the past six months and each time the market recovers.

At least 3 flash crashes in the past 6 months

It certainly looks like a ton of money left the market Friday.  Just look at the formally high flying tech sector.  Interestingly, visually it looks like each crash is progressively more dramatic with more volume.  IF the money left the high flying tech sector, where did it go?

During a correction or consolidation, money basically goes one of three places.

  1. Cash.
  2. Defensive Stocks (like gold or consumer goods, food products and tobacco).
  3. New Sectors.

So to try and answer this I took a look at some screeners.  One is FINVIZ top gainers.  Believe it or not, there were 153 stocks earning over 5% Friday.  That is a lot for such a bad day on the street.

Here is how the 153 broke down sector wise.

Sector Industry Sub-Total
Basic Materials Independent Oil & Gas 20
Basic Materials Oil & Gas Equipment & Services 12
Basic Materials Oil & Gas Drilling & Exploration 6
Basic Materials Oil & Gas Refining & Marketing 4
Basic Materials Gold 1
Basic Materials Industrial Metals & Minerals 1
Basic Materials Major Integrated Oil & Gas 1
Basic Materials Nonmetallic Mineral Mining 1
Basic Materials Oil & Gas Pipelines 1
Basic Materials Steel & Iron 1
48
Consumer Goods Personal Products 3
Consumer Goods Sporting Goods 2
Consumer Goods Textile – Apparel Clothing 2
Consumer Goods Beverages – Soft Drinks 1
Consumer Goods Cleaning Products 1
Consumer Goods Electronic Equipment 1
Consumer Goods Home Furnishings & Fixtures 1
Consumer Goods Textile – Apparel Footwear & Accessories 1
12
Financial Regional – Mid-Atlantic Banks 7
Financial Money Center Banks 2
Financial Regional – Midwest Banks 2
Financial Regional – Northeast Banks 2
Financial Savings & Loans 2
Financial Asset Management 1
Financial Credit Services 1
Financial Investment Brokerage – National 1
Financial Regional – Pacific Banks 1
Financial Regional – Southeast Banks 1
Financial REIT – Diversified 1
Financial REIT – Hotel/Motel 1
Financial REIT – Office 1
23
Healthcare Biotechnology 12
Healthcare Medical Appliances & Equipment 4
Healthcare Medical Instruments & Supplies 3
Healthcare Medical Laboratories & Research 3
Healthcare Drug Delivery 1
23
Industrial Goods Heavy Construction 4
Industrial Goods Industrial Electrical Equipment 2
Industrial Goods General Building Materials 1
7
Services Shipping 8
Services Apparel Stores 6
Services Specialty Retail, Other 5
Services Department Stores 3
Services Home Furnishing Stores 2
Services Air Services, Other 1
Services Business Services 1
Services Education & Training Services 1
Services Gaming Activities 1
Services Publishing – Books 1
Services Restaurants 1
Services Security & Protection Services 1
31
Technology Communication Equipment 2
Technology Semiconductor – Integrated Circuits 2
Technology Application Software 1
Technology Diversified Communication Services 1
Technology Networking & Communication Devices 1
Technology Wireless Communications 1
8
Utilities Diversified Utilities 1
Total                            153

 

Of course, one day does not a trend or correction make but it might be interesting to keep an eye on what the market does, and if it does correct, which sectors hold up better than the rest.

Will it be Basic Materials?  Financials?  Healthcare? Or some yet to be determined sector?

What do you think?

Flash crash, beginning of the end, or market rotation?

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No Love For The Bear

The stock market is nearing all-time highs.  In fact, it seems to keep reaching new ones on a regular basis.

Advancers are leading decliners.

Percentage of stocks above their 20/50/200 DMA is higher than stocks which are not.

The only thing that the bears can take some comfort in with these charts is that some of the volume and oscillators are indicating a possible downward trend.

Yes, there has not been a whole lot of love for the bears lately and they are feeling left out.

The contrarian would say, this means we are due for a correction.

The conformists or anti-contrarians say lets keep the party going.

The realists say, perhaps we should look for stocks or sectors holding up well enough but not yet joining the party.  Perhaps stocks with some “safe” characteristics such as dividends would be nice to include too.  Perhaps these are just waiting for the right invite.

The chartists say the overall market is doing well.  SPY and DIA charts look strong . . .

Though, the QQQ is perhaps looking a bit extended.

So where do we look for stocks and or sectors holding up well just waiting to rally?

Mr. Bull, I’d like you to meet Mr. Financial Sector.  He’d like to join the party.  He’s just waiting for the right conditions.   Like . . .

–          Financial Reform

–          Tax Reform

–          Inflation and Rate increases

Those are the tickets that will get him out on the dance floor dancing the happy dance.

The technical charts for the financial sector look promising.  They look like they are poised for a breakout.

Of course, bulls are hoping for an upward breakout, and the bears are hoping for a breakdown.

Unfortunately for the bears, there are the three catalysts, previously mentioned, just waiting to kick in.  And they are pretty strong catalysts.

Unfortunately for the bulls, the current administration and congress is painfully dysfunctional.  When and if all this is going to happen is anybody’s guess.

So until then, we wait and hopefully enjoy the ride.

Buy The Rumor, Sell The News

oil-well

This past week was a great example of buy the rumor. It all started a week ago last Thursday with a report that Venezuela was pushing for an emergency OPEC meeting to discuss cuts oil production. All this was to help stabilize the oil market.

All the “experts” said Saudi Arabia has no intention of cutting oil production nor do they want to meet.
So the “experts” gave it next to zero chance of happening.

But the markets loved the thought of stable oil prices. So they picked up the rumor ball and started looking for others to join in and play, building hype and hope that things would get better.

Then last Monday, a meeting was held and three nations agreed to not increase production if other nations went along.

Game On!

And the “experts” were still doubtful but now gave an agreement a 20% chance of happening.

By Wednesday we had Iran, the one country everyone said would never agree saying they supported any effort to raise the price of oil. But not actually agreeing to the agreement.

Note: This was actually a beautiful setup. The Saudi’s are not going to do anything EVER to allow Iran to regain market share and wealth from selling oil. And yet we had this concept of a plan which on the surface appeared to provide hope but in reality only reaffirmed that current record production of oil isn’t going to stop and thereby keep pressure on Iran. And Iran knew this but said hey, any idea that raises the price of oil is fine with us.

And then UAE stepped up to support the agreement.

Suddenly the odds were looking closer to 50/50.

Wall Street has a funny way of computing odds. By now there were only 4 out of 13 OPEC nations and 1 non-OPEC nation agreeing. Hardly 50/50 but hey, it’s Wall Street. They do funny things with numbers all the time.

And the price of oil had shot up over 15% in less than 5 business days!

And yet none of these countries had actually said they were holding production levels much less cutting production. Only that they would hold production at the current January output if all the other countries agreed.

I had lots of questions from the very beginning such as:

  • Is there a timeline for getting everyone on board? In other words, if in 30 days a quorum is not reached then they go back to business as usual?
  • Can the currently agreeing nations increase production until all other nations agree? After all the agreement is not binding until if and when other nations agree.
  • How is anybody going to get Iran and other nations like Iraq to ever agree to cut production just when they see the light and profits for the taking at the end of the sanction tunnel?

But none of those questions mattered to the market. A market that was begging for something, anything, to stop the slide of oil. And by Wednesday the rumor mill and game of hype and hope was in full swing!

Then the inventory report came out Thursday morning at 11:00 am and showed levels continuing to rise!

Sell, the news!

Oil stocks and ETF’s fell.

All three market indexes suddenly stopped their wonderful three day rally.

If you had not sold your calls or momentum stocks before this morning, and replaced them with puts, it was too late.

Weekly Stock Bites – Good News, Bad News

stock-market-analysis-cup-coffee

After a successful bounce off of a key support area and a two day rally, all eyes and ears will be focused on the direction of the market, the price of oil, quarterly reports and the Federal Reserve meeting. That my friends is a lot to digest.

Well, we have some good news and some bad.

Analysts are expecting another quarter of decreasing revenue and earnings. Depending on who you ask, this would be at least the third straight quarter of lower revenue and earnings. That my friends, qualifies as a trend.

To compensate for this, most analyst’s estimates have been lowered even more. The hope is that companies will be able to beat these depressed estimates. Thereby, looking good.

I’ll let you decide which one of those is the good news.

Not impressed

Personally, I’m not impressed with either one.

The price of oil went up this past week.  That is good news.  The bad news is, if you believe the “experts”, the price needs to stabilize in order for the overall markets and investors to feel confident and put a halt to this bear market. Unfortunately that “stabilized” price target is somewhere north of $40. So until we hit that, this upward movement in oil is based on hope. It’s OK to buy hope. Just be prepared to sell the news.

Oh, and last but certainly not least is the Federal Reserve meeting. Will Janet Yellen come out and say . . .

Oops!  You know what I said about all those interest rate hikes? Well, never mind.

Or will she attempt to spread feelings of calm and peace throughout the markets in an attempt to show that things really are looking up?  I’m willing to bet she will try to sell us hope and warm fuzzies.  Again, buy the hope and even some warm fuzzies. Be prepared to sell the news.
So what does all this mean?

Is the market reversing off of a double bottom and signaling the return of the bulls?

Or is this simply a dead cat bounce before the market continues its bearish down trend?

dead_cat_bounce

In my last post I reiterated the possibility of the market entering into neither a bull or bear market but rather a consolidation range. They key to this is what happens with key support and resistance areas.

Key support is another test of the previous lows.

dead cat bounce or successful test of support?
Dead cat bounce or successful test of support?

Key resistance is between 1950 – 2000 for the S&P. Any positive breakout above this area would signal, at a minimum, a potential break of the downward trend.
Until next time.

Be Good, Trade Well, Have Fun!

It’s A Bottom !

its-a-bottomI’m calling it.

The bottom is in.

The market managed to successfully bounce off of a key support area

and string together two winning days in a row.

All three index charts support it.  But I’ll use the SPY index since it is the best example.

spy-dbl-btm

YAY!

Everybody Jump Back In

Everybody back into the water!

But wait.  Hold on to your britches young whippersnapper.

Remember the New Year?  Three long trading weeks ago I posted an alternative market direction different than most “doom and gloom” recession naysayers, or “hurray it’s a new year” lets kick start this bull back into gear cheerleaders.  I proposed a consolidation phase where the market would swing within a 15% range.  A range that just so happens to line up with the previous 52 week high and the bottom of the corrections we have experience within the last 6 months to a year.

In order to do that the market had to reach, AND, bounce off of this low support line.

Now here is the interesting thing about consolidation bases.  It is neither a Bull or Bear market.  Though either can occur as a breakout or failed support.  The consolidation base is a trading range.  The market can trade anywhere in between the top level resistance and the lower level support.  It is not necessarily a straight elevator / escalator ride up to the top and bottom.  There are often tests and retests of support and resistance and sometimes a little bit of indecision and non-direction price action (as in somewhere in the middle).

Of course, I could also be wrong about this whole consolidation base thingy.

Baby Girl Reacts In Shock and Surprise

Shocking!  I know.  But it has been known to happen.

But for now I’m calling this a victory prediction.

Next week is another trading week full of key quarterly reports, market data and yes, even another Federal Reserve meeting.

So anything can and most likely will happen.

Trade well my friend.