Yesterday was a disconcerting session for a few reasons, not the least of which we saw that a guidance cut by a high visibility company certainly still has a large impact on the general market. Further, a handful of names – especially in the tech sector – that had held up reasonably well the past few weeks experienced significant weakness. This is very similar to what we saw right before the EU summit rally when a host of consumer discretionary names suddenly experienced serious weakness after being one of the last places to "hide out". We also saw almost the entire EU summit gap reversed yesterday, as the market is doing an excellent job making it very difficult on both bulls and bears. …
It has been an interesting 48 hours for Questcor Pharmaceuticals (QCOR). Yesterday in an SEC filing the company reported blockbuster sales of it's sole drug Acthar. The stock surged. Today, mid-day, Citron Research (a noted short seller) issued a stinging report on the company that was very similar to the attack by another website back in January of this year. That attack dropped the stock from the low $40s to the mid $30s instantly, and we had a similar reaction today. The timing was excellent since I believe the company is not allowed to respond to the "allegations" (which are things such as there will be a generic drug coming down the pike someday to compete with Acthar) as it is in a quiet period ahead of earnings. That said they are at a conference this Friday so should be interesting, although they will probably repeat the exact same defense they rolled out 6 months ago. …
If the pattern of the past 3-4 months continues, after these type of washouts where chart after chart goes from "constructive" to "smashed" and the index swoons, we'll have a big gap up sometime in the next week and a huge 1.5-2.0% day. Of course it will come out of nowhere and if you are not in the market overnight to take advantage of it you sit on the side of the road watching it pass by at 90 mph. By the time it happens, the majority of individual equity charts are damaged seriously.
This has been the only consistent way to make money in the market in the past few months. No time to build positions incrementally or exit them – it's all in or out, and the rallies happen after a ton of technical damage has been done in individual charts. Not a world for any sort of trend following at all.
EDIT – after that end of day bounce the S&P 500 closed almost exactly on its 50% retracement of the move off the June 26th lows – July 3rd highs. Not sure if those are any true buyers anticipating what I wrote above i.e. "gap up opens" happen immediately after bad days, or some short covering. Either way it appears this is the 3rd failed bounce attempt of the summer.
I came in the day asking which of the 2 gaps we would fill first on the S&P 500 chart. Wouldn't it be ironic in this wholly bipolar market to fill both the same day? It is still a long shot as it would require about another 10 points lost on the S&P 500 but it is not out of the realm of possibility. This Cummins news has really lit a fire under the market … and not in a good way. Even more "ironic" today was a day European yields fell and there was no major economic news to deal with.
Cummins is now down almost 10% – always eye opening when such large companies can lose that much market cap in an hour.
Another warning, this time from industrial multinational Cummins Engine (CMI) – the company has a lot of Asian exposure, especially of the Chinese and Indian kind. Looks like they are cutting 2012 revenues to "flat" versus 10% growth. It is putting some pressure on the market, but bigger picture showcases how this is going to be a much more difficult earnings season than we've experienced the past few years. At the micro level each of these warnings does damage to the stock, but of course the question (as asked yesterday) is how much of this is baked into the entire market at the macro level? …