After the worst start to a year on record for the Dow Jones and S&P 500, we are now in a confirmed bear market, and that means that the major trend is to the downside. Instead of “buying the dip,” investors now seem more comfortable “selling the rip,” which tells me that traders should be initiating bearish positions into any rallies.
As I’ve said before, in bear markets, “When they raid the house, they take all the girls and the piano player.” I also noted that the market was being held up by just a few big-name stocks — namely the “FANG” stocks: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOG).
Collectively, these companies have represented the piano player in this market, and the raid is finally catching up to them. The FANG stocks have been hit at last, and they have incurred losses ranging from 5%-11% since the new year began.
From here, I believe that the market weakness we have seen so far this year will continue, but the question now is how damaging it will be. My opinion is that it will be more severe than many expect.
Having said that, it is not uncommon to see very sharp rallies during a bear market. Like we saw on Wednesday when the major indices lost 2%-3% each, when markets get oversold, these rallies act as a kind of temporary release valve that pushes stocks back up again.
That release came yesterday when the broad market rebounded, but that strength may be attributable to the upcoming market holiday on Monday. U.S. markets will be closed all day next Monday, Jan. 18, for Martin Luther King Jr. Day and, typically, the market sees strength leading up to a holiday.
I know that many of the bulls out there are hoping for a white knight of sorts to save this market, but I don’t expect that earnings will do much to help the trend. On the other hand, I don’t necessarily expect earnings season to hurt the market.
A lot of economic reports will cross the tape today, but I don’t think they are going to have much influence either. They might show some kind of a bias, bullish or bearish, but any effects will be felt only in the very, very short term. There’s no escaping that this is a down market, and since Jan. 1 investors have sucked an enormous amount of value out of the market, to the tune of $2 trillion.
As capital evaporates, it causes a pullback in economic activity, which, in turn, can lead to a recession. This is a real concern of mine and, as I’ve shared, there are many signs that are already pointing to recession. Other concerns I’ve had are starting to come to fruition as well, and now there are confirmed claims that as many as one-third of energy companies in the U.S. will go under, which has been a worry of mine for some time. I’ve been actively trading the weakness in the energy patch for at least a year, as we opened the now bankrupt and delisted Alpha Natural Resources spread last February.
In addition to all the fundamental concerns, the technical clues have been apparent for some time as well. The first bear market technical sign was the market’s crack of support and breakdown out of its seven-month trading range, indicating a sustained move down would follow. But, more recently, we saw the market falter in the first trading week of the year, which is typically a bullish period 80% of the time. Instead, we saw a major decline, and that is not a good sign.
The market broke down from its more recent, short-term trading range when it fell below the 2,000 level on the S&P last week. From here, my expectation is that we’ll probably test the August intra-day lows on the major indices, and we’ll see what kind of support we find there. All in all, the takeaway this week is that, despite any near-term rallies, I think the market is ultimately going lower.
No surprise, then, that I have a put option for you in an beaten-down sector that only looks to get weaker: oil, via an oil ETF. Simply put, oil looks to go lower as economically-weak producing countries remain unwilling and unable to slow their outputs.
Buy to open the United States Oil ETF (USO) Mar 9 Puts (USO160318P00009000) at about $0.70 or lower.
After entry, take profits if the ETF price hits $8.10 or the option price hits $1.30. Exit if the stock price closes above $9.80.
Also, keep an eye on the Olin Corp. (OLN) May $15 puts I recommended last week. OLN is down some 5% as I write, and the stock may hit my $14. 60 target before too long.
Remember, U.S. markets will be closed all day Monday, Jan. 18, for Martin Luther King Jr. Day so look for your next Trade of the Day to hit your inbox on Tuesday, Jan. 19.
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