In a news driven market that lacks clarity and conviction the strangest things can and do  happen. With the buyers deciding to start the day on a positive note putting money to work the indexes climbed steadily gaining more than one percent by late morning and heading toward lunch. But, the biotech stocks started moving lower following comments from Hillary Clinton that she would recommend a plan that would prevent price gouging by the drug manufacturers. The SPDR S&P Biotech ETF (XBI) fell more than five percent in response to the news. As a side note… don’t we already have price control points in the Affordable Care Act? Just asking? When the market is void of confidence it reacts to news. The comments from Clinton were news… by the way, if elected, she would not take office until 2017 and by then she will have forgotten she made that comment. The biotech sector has been weak since hitting new highs in July. The selling sends the index back near the 200 DMA and we will see how it unfolds from here. I would like to say it is a buying opportunity, but only time will determine if that is true.
You have to love how weak the conviction is relative to market direction. With that story in mind I wanted to mention the obsession to trade or be doing something in this market. Using the above as an example, biotech is at the same level it was in early March. That means for the last seven months the sector has returned zero! Now I know there are masters of the investment universe that believe they can time the movement or direction of the market in short intervals. I am not saying that they cannot do so… what I am saying is that uncertainty and a lack of clarity in the current cycle does impact the accuracy of doing this with any consistency. Thus, I am of the opinion (right or wrong) that attempting to predict direction is a fools game currently. If we used simple swing trading principles for the bottom reversal off the August lows on XBI you would have stopped out of the position today with a break even trade at best. That would mean three weeks of having money at risk in the current market only to break even. There are times when that risk/reward makes perfect sense… but, now is not one of them. Risk/reward is running high due to the uncertainty in the market environment.
I have been having this conversation with plenty individuals of late, and the bounce off the August 24th lows has only accelerated the amount of those conversation. Everyone want to pick the lows and get in at the perfect time. Unless the market is sold out and there are no more reason to sell… it can always move lower, despite what you think or believe. I am not here to say what is right or wrong only to state what I believe to be true from my experience. During periods of uncertainty cash is the best sector. I can’t lose money in cash and not losing money is a whole lot better than losing sleep over where my money is invested. Technical analysis works best in trending markets. Volatile markets are better left to those who like gambling. It is like playing a game of market roulette where you can pick red, black or green and hope the pearl ball lands in your favor. The odds seem to be in your favor, but the reality is they aren’t. This is still not a market with much in terms of clarity or conviction.
One index that did look impressive on the day was the S&P 400 Midcap stocks. The pattern for the index is a rising wedge and offers some upside if the conviction sticks. The key is to take note of the downtrend in play and realize the upside resistance points the index faces. Measure the potential risk of any trade position and then determine the best approach going forward for you relative to your risk tolerance. The Dow also posted a positive day, but likewise faces some key resistance points if the upside is going to stay in place.
Overall the intraday actions defines very well the emotions in play along with the whiplash effect of news. I am still willing to take it one day at a time as the trend, confidence and clarity reestablish themselves in the current market environment.