“Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”
— Warren Buffett
We have not been impressed with the three-day bounce following the 8.4% markdown of last Tuesday-Thursday in the Nasdaq. Volume has been light. As the adage goes, it takes volume to put a stock up, but a stock can fall of its own weight.
Today’s (Tuesday) reaction to news out of Europe is not the type of reaction that is expected in a brand new bull market, a market that would ignore bad news as having already been baked into the cake.
A market that rises for a few weeks on less-than-inspiring volume is a market that can be given the benefit of the doubt. However, when an advance reaches six or eight weeks in duration, roughly, it needs to show it is serious about being taken seriously. Therefore, the seven-week-old advance is at the point where it is fish-or-cut-bait time.
The market does have a few things going for it. Most of the sectors that need to lead in order for concerns over recession to dissipate are leading…
…with a few exceptions.
It is difficult to picture a market engaging in a bull move with a falling financial sector. Underperforming is permissible. But not falling. The financials have a well-deserved reputation as a leading segment. As one example, the shares peaked in June ’07, which presaged the top of the ’02-’07 bull market in the Industrials by four months. This time around, the stocks peaked in February ’11, two-and-one-half months ahead of the May top in the averages.
As for leading stocks, they hold up, for the most part. Baidu (BIDU) is the most glaring exception among the marquee glamours, and is setting itself up as a short candidate. Price has bounced back into overhead supply from its August decline and Tuesday it rose above the 200-day MA (not shown) by about 40 cents before being turned back. Prior to Tuesday, the stock had three major distribution days in the prior five outings. Moreover, of note has been the stock’s inability to build and break out of a suitable basing pattern, as did its brethren AAPL and AMZN. BIDU may well be a victim of the China slowdown. Something is not right here.
Another institutional must-own, Amazon.com (AMZN), softens, but does not come undone.
Ditto for AAPL.
The new-issue market, one indicator of the speculative sentiment, is done. Arcos Dorados (ARCO), an operator and franchisor of McDonald’s restaurants in Latin America and the Caribbean, was perhaps the leading recent-new issue in terms of relative strength. Last week’s sell-off was swift.
Leadership titles remain Athena Health (ATHN), Alexion Pharmaceuticals (ALXN), Cerner (CERN), Watson Pharmaceuticals (WPI), Petsmart (PETM), Ulta Salon (ULTA), Hansen Natural (HANS), Dollar Tree (DLTR), Chipotle Mexican Grill (CMG), Tractor Supply (TSCO), and Green Mountain Coffee Roasters (GMCR).
In summation, except for a couple of days two weeks ago, the seven-week advance has not shown the level of institutional conviction that normally correlates with a sustainable advance. Growth stock leadership, though dented last week, holds up generally. Participants should not expect any of the leaders mentioned here in recent weeks to buck any renewed liquidation in the averages. We remain flexible and open to new developments as they occur. For what is important is the market’s own story.