After two days of a sharp sell-off that saw a broad number of leading stocks all get hit on sharp selling volume, futures are bouncing this morning in what looks like a normal reaction bounce. A number of stocks got hit hard including Ruckus Wireless (RKUS), Three-D Systems (DDD), Grand Canyon Education (LOPE), U.S. Silica (SLCA), U.S. Gympsum (USG), Lumber Liquidators (LL), Michael Kors Holdings (KORS) and Generac (GNRC), just to name a few. As any of these stocks attempt to rebound with the market, investors might consider fading the strength unless and until signs of strength area evident in any such rebounds, such as high-volume moves off of key moving averages like the 50-day or off of critical support areas such as the tops of prior base formations.
As the selloff continues on higher volume, make sure you obey your sell stops. High relative strength stocks have often sold off two to three times as hard as the major indices so much can be lost in a short time if stops are not heeded. While the markets could rebound and move higher on quantitative easing, conditions could worsen. Put focus on price/volume action rather than on trying to come up with a rationalization, or the lack of it, for the sell-off. Given that we watch our stocks first, and the indexes second, the action in individual stocks constitute something of a warning shot across the bow.
Given that the market is only two days off of its peak, the short side of the market is as yet relatively undeveloped, but members should watch for any Short-Sale Set-up alerts that are forthcoming if and as we believe certain stocks become actionable on the short side.
Economic news was negative Thursday as leading indicators, the Philly Fed factory index, jobless claims and Markit Flash Eurozone Services all failed to meet expectations with the Philly Fed coming in with a big downside surprise of negative -12.5 vs. expectations of a positive 1.5. Whether this is an indication that the tepid, quasi-manufactured economic growth we've seen as of late is coming to a screeching halt is yet to be seen, but we would expect that further data would confirm the onset of economic weakness, while the market's action, as a discounting mechanism, will likely provide the first initial warnings. This morning's rebound attempt should be monitored closely, as any failure or reversal may indicate that further downside is in store. Stay alert!