Trader Talk

Behind the stock market's whippy behavior

Traders on the floor of the New York Stock Exchange, April 11, 2014.
Getty Images

This is really getting to be old: Almost every day this month, right after the open, the NASDAQ is pressured...the trade is working, so they keep pressing, but still. How far down the road are we?

It's not clear. Goldman Sachs' David Kostin thinks we are 70 percent through, others have insisted the hasn't had a 10 percent correction in more than two years and, given that we're only 3.5 percent off of the highs, we are at least a few more weeks away from a bottom.

Many feel that the S&P should correct at least five percent for it to be near over, that not enough pain has been felt so far.

What's clear is for the near-term, traders have moved from "buying on any weakness" to "selling any strength," at least in internet and biotech names.

But there's something more going on than just "overvaluation issues" with internet and biotechs.

Today, for example, the Dow goes from flat to up 100, to down 200, to up 100...all in a few hours.

No, there are other issues affecting the market. There are:

  1. Ukrainian-Russian tensions;
  2. China growth concerns (Q1 GDP out tonight);
  3. Choppy U.S. economic data. One day Retail Sales are good, the next day NAHB sentiment numbers and Empire State Manufacturing are weak. Consistently strong (above-consensus) economic numbers would be a hig help stabilizing the market.
  4. Tax selling last week. Hard to quantify, but high bracket taxpayers have clearly had "sticker shock" this month.
  5. Vacation week: Passover, Easter and spring break all add up to less market participants, even if some ETFs have heavy volume;
  6. Effect of Fed tapering. is economic strength enough to offset the negative liquidity effects of the Fed's taper?

What about earnings? What's happening is not about earnings, at least not yet. Coke (KO), Johnson & Johnson (JNJ) beat expectations and are acting reasonably well, even Citigroup (C), which reported yesterday, is trading up. Certainly more bullish commentary from management teams would make a difference.

One thing's for sure: This is a golden age for technical analysis. These kinds of moves in internet and biotech names sure make technical analysis more relevant, and fundamental analysis less.

Seriously: How can you possibly have a lot of faith in fundamental analysis when, for example, YELP (YELP) goes from $100 to $60 in six weeks? Or Netflix (NFLX) goes from $450 to $320 in the same period?

Of course, fundamental guys argue that stocks get overvalued. Duh. But say what you will about technical analysis: If you are in a sector where fast money is prevalent, you are a fool if you don't have very good entry and exit points, most of which will be built around technical.

What's up with airlines? It's guilt by association. These stocks are not suffering from the overvaluation blues. They have been market leaders all year on strong fundamentals: Pricing improving, capacity being reduced.

And they have been getting weaker recently. In fact, many of the leaders are now in correction territory.

From recent highs:

What's going on? While it's not a valuation issue, they suffer because they are heavily OVEROWNED by hedge funds. Many of these long-only funds have been clobbered recently by their excessive positions in biotechs and internet stocks.

The margin debt of these funds is very high, so when they are under pressure they need to sell their most stable and profitable positions to cover losses and--possibly--margin calls.

Guess what those positions are? Yep. Airlines.