Stock Trading: Dissecting Today’s Market Action

One word - WOW! The Dow (^DJI) traded down as much as 300 points before closing up 6.75 or 552 points. The 910-point range is one of the largest ever and simply amazing.

THE BOTTOMLINE: The best way for me to explain today is in chronological order.

Pre-Market: The futures were slightly negative when I rolled out of bed and they did not do much throughout the session even though jobless claims jumped to the highest level since 9/11. The market opened slightly higher.

10:00 AM: A trade alert was sent to all subscribers of The ETF Bulletin recommending a buy of the ProShares Ultra S&P 500 ETF (SSO) at $25.05 based on the rallying off support theory. At the time the market was up slightly.

12:00 PM: The market had been up over 100 points and down as much as 80 at this time, but as stocks began to hit the lows of the session it was the beginning of a nasty hour of trading. By 1pm the Dow was down over 300 points and very close to a multi-year low. The S&P 500 (^GSPC) and NASDAQ (^IXIC) were trading at levels not seen since mid-2003 and there appeared to be no hope for the market. I must say I was near panic levels, which is VERY rare for me, and was tempted to take the loss on the SSO that was recommended 2 hours earlier. This would have resulted in a loss of about 9% in a very short period of time, but for a minute or two, all hope appeared to be gone. But at that time the market began to put in a bottom and buyers came back into stocks.

1:00 PM: The markets bottom at the low of the day, which happened to be 5-year lows for many indices.

1:50 PM: The Dow moves into positive territory and is now 350 points off the intraday lows.

2:10 PM: The Dow is back down 80 points and I have a thought that the market could have rallied into positive territory as a head fake and the next move was new lows. Only time would tell.

2:30 PM: The Dow breaks through the earlier highs of the session.

3:10 PM: The 200+ point gains are gone and with the Dow up only double-digits it appear the rally is losing steam - or was it?

3:20 PM: The final leg of the rally begins and the Dow moves 500 points in the final 45 minutes of trading to close on the highs of the session and market a significant double-bottom pattern.

4:00 PM: Whew! What a day, I think I lost a few hairs on that one. Good news for subscribers of The ETF Bulletin - SSO  closed the session at $28.10 and is up 12% in on trading day. Congrats! We will look for some follow-through tomorrow, but today’s action alone is enough to indicate the lows of October are going to hold for at least a few more weeks. Look for a retest of the 1000 level on the S&P 500, which is the upper end of the current “bottoming process” trading range.

TIME TO LOOK AT EMERGING MARKETS AGAIN?

As the major US indices either broke through their October lows or came very close, the emerging markets ETF’s remained several percentage points above their respective lows. Is this short-term relative strength a sign of things to come?

THE BOTTOMLINE: The recent outperformance can be illustrated in a number of emerging markets ETF, but specifically in the iShares Emerging Markets ETF (EEM). The October low of $19.16 was in no real danger today as the ETF hit an intraday low of $20.89. The iShares FTSE China 25 ETF (FXI) has held up even better, today’s pullback did not even breach the 11/6 low. Since the sell-off began last year both EEM and FXI have underperformed the US indices, however looking ahead I feel they both offer great opportunity for long-term investors. Consider the valuation in China is just as good if not better than the US (depends on the estimates) and growth is expected to be much higher - China would be a better investment opportunity.

Keep in mind that investing in one country will carry more risk than spreading the money through a number of emerging market countries. This is where EEM should offer less risk and more diversity, but not as big a reward (in theory). You must be ready for high volatility as FXI closed with a gain of 15% today and even EEM gained over 14%.

INSIDE THE HEAD OF A TRADER - DAN CONNOLLY

I thought it would be prudent to get thoughts about the market from a real-life trader on a day like this. This is what Dan Connolly, a well-known trader and friend of mine from Chicago, had to say.

“The market has had its eyes set on retesting the October lows over the last week and breached the lows on the S&P 500 during the noon trading hour, triggering stops and taking the index as low as 820. When the NASDAQ traded to the exact 50% retracement of the highs from last fall and the Dow failed to break below its low, a massive short covering rally was setup and volatility ensued throughout the day. Picking bottoms is dangerous, but this type of volatility lately has been more indicative of short-term lows than a free fall.”

Posted in Categories: Contributor, ETFs, External Research, Stocks.

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