The market was primed to go higher today as Intel Corporation (INTC) and CSX Corp. (CSX), two key market leaders, were rocking after hours last night after reporting earnings. Futures were exploding higher due both to those reports and to the fact that the daily and 60-minute, short-term charts were oversold. A nice combination for the bulls to get some momentum.
Then, overnight, we got the news from overseas on their economies, plus further bad news on the Ebloa virus, which caused the futures to reverse hard, allowing for a massive gap down across the board of 1% or a bit more. That's unusual for the indexes. They rarely move that much in a day at the open.
The bulls tried many times, and quite successfully, to drive the market up intraday, with 200-point rallies on the Dow. After failing to hold those rallies, the market finally found the type of rally late in the day that normally puts in the short-term bottom. However, that might not be the case, as after hours we're seeing carnage in eBay Inc. (EBAY), and especially Netflix, Inc. (NFLX), which is down an incredible 100 points at the time of this writing. If you own froth into earnings, this is sadly what can happen. Many trading careers ended this evening. No mercy in this environment.
With the VIX printing a topping stick, and, thus, giving the market hope to go higher short term, it'll be interesting to see what the market can do after these two debacles after hours. It's hurting the market after hours, to be sure, and now we'll see if they recover, or if today's topping stick in the VIX was simply a head fake.
In any case, the damage has begun. After too many months of the bull-bear spread over 30%, and many months over 40%, the bull-bear spread is now down to 20.5%. The bulls are down to 37% with the bears up to 17%, but 17% is no where near where they need to be as time moves along. We need to see the bears up to near 30%. Give me at least 25%, but hopefully 30% or more. The bulls are leaving, but only moving towards agnostic. It looks like it's going to take a lot more to get them to turn fully bearish. Thus, it appears that over time the market will have to go much lower to create a lot more fear, and you can see how fast that can happen. In time, I would think it's possible that we'll see sub-10 on the spread, but time will tell, folks.
For now, the market is giving froth the medicine it needs. The lower the market goes over time the happier we'll all be as it will allow the market to rally hard when the correction finally does come to an end. Like I've said many times, it'll feel like a bear even though it's not. If we can get 15-20%+ on this correction, we'll all celebrate. 1700-1600 would be a gift for the bulls, unless, of course, you never sell and have to deal with those types of levels. Even though froth has improved, bears really haven't yet. We need a lot more time, so be patient before going in hard to the long side for a sustainable move higher.
So the selling is here folks. With today's VIX stick we should rally as we're also very oversold. That said, the earnings tonight may cause a double-bottom test tomorrow, and if it does go that low, we need to be ready for the possibility that it'll just keep going lower. There are never any guarantees about bottoms in a correction, even when one clearly appears to be present. It doesn't get any clearer than today's VIX stick, but we shall see if the market can overcome the nastiness from NFLX and EBAY.
Keep things light. Nothing aggressive. Stops tight please.
Jack Steiman
