Continued fears over the debt ceiling and the probabilities of default dominate trader talk. The NASDAQ led all major averages lower closing down 2% followed by the Russell 2000 which closed down 1.71%. Volume exploded on the day as institutions continued to dump stocks even as earnings season is upon us. It is clear risk is back on the table and given the big jump in the VIX and price action it may take us some time to clear out the current issues in the market. Caution is warranted as we have moved into neutral position and will await further price cues from the market.
We continue to see a dysfunctional government as both sides appear to be running in opposite directions. The idea of our government is for all three branches of government to function together not separate. At the moment, we simply do not have the leadership to see us through some tough times and it is going to affect the economy in some capacity. Will it mean lower equity prices? Time will tell and so will price. We’ll await our signals before trying to forecast where the market is headed.
What is concerning to us are some moves from market leaders. Stocks like FB, GOOG, and PCLN aren’t painting a rosy picture for us. AAPL is at least somewhat holding up, but the stock has been a laggard this year and not a leader. YELP, MELI, TRLA, Z, and NFLX are a few other leading stocks who had a very tough day in the market. Does this mean we are going to get a huge correction? Not necessarily, but the odds of new highs have diminished given the action as of late. We’ll be paying attention to stocks that hold up during the correction as they are likely to be the next uptrend’s leaders.
The action over the last couple of weeks has led us to oversold conditions. It would not surprise us to see any sort of bounce from the market. Stick with the plan and Big Wave Trading.
