Nasdaq Leads Sell-Off As Market Heads Into Correction

A mixed batch of economic data Wednesday and concerns over the first reported case of Ebola in the U.S. triggered one of the biggest stock sell-offs in months.

The Nasdaq composite, down 1.6%, fell definitively below its key 50-day moving average for the first time since April 4.

The S&P 500 dropped 1.3%. The IBD 50, a proxy for high-growth stocks, lost 2.5%. The Dow utilities, often a gauge of investor defensiveness, rose 0.4%.

The NYSE composite, hit with sharp losses among oil, transport, machinery, lodging and chemical shares, fell 1.2% and sliced through its long-term 200-day moving average for the first time since Nov. 14, 2012.

The heavy selling in higher volume across the board marked yet another distribution day — the Nasdaq’s eighth in recent weeks. That alone justifies a downgrade in IBD’s current outlook to “Market in correction.”

A new reader may ask: Does this mean I should immediately sell everything in the portfolio?

No. Deconstructing a portfolio typically goes in steps.

First, getting off margin is imperative. Raising some cash by cutting losses at 7% to 8% or even less is wise. And nailing down profits in some of your stocks, even if they haven’t yet reached 20%, gives your account a valuable cushion to ride out any further market downside.

It makes sense to at least take partial profits in your biggest winners if they have already scaled a course of three or more genuine bases and are showing slippery footing in their latest breakouts. Assess each stock on its own.

Uncertainty over the future path of interest-rate policy has certainly sparked numerous pullbacks in the market. The Federal Reserve is expected to completely remove its massive bond buying program later this month.

Yet over the past year and a half, the market has also found the mettle to rally soon after the options market showed spikes of panic.

For instance, the put-call volume ratio hit 1.15 or higher on both April 11 and Aug. 1. The Nasdaq was in the middle of a 9.7% pullback in the first case; in the late summer, its correction was limited to just 3.7%.

The Nasdaq lies just 4% below a multiyear high of 4610. Yet, the small-cap S&P 600′s struggles reflect a market that’s also in an intermediate-level correction. The S&P 600, down 1.3% Wednesday, stands 10% below its July 1 peak.

Indeed, other markets have pulled back. Commodities as a group have lost all of their gains since Jan. 1. (See chart on B12.)

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Soft Drink Makers Are The Toast Of Defensive Stocks

The stock market is having trouble, so it might be a good time to propose a toast to three dividend-paying soft-drink makers trading near highs.
Raise your glass to Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP) and Dr Pepper Snapple (NYSE:DPS).
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Bill Gross: His Former Pimco ETF Redemptions Slow

The stampede out of Pimco slowed on Tuesday, two days after co-founder Bill Gross announced his departure.

Shareholders yanked $97.7 million out of Pimco Total Return ETF (ARCA:BOND), a high-profile exchange traded fund that Gross ran until exiting Pimco, according to Morningstar. Tuesday’s number was well below Monday’s $446.5 million in redemptions but well above Friday’s $10.9 million.

Total redemptions amounted to almost 19% of the ETF’s $3 billion assets.

BOND is the ETF version of Gross’ former flagship, the $222 billion Pimco Total Return Bond mutual fund. (Morningstar does not collect daily flows for mutual funds as it does for ETFs.)

Gross’ departure has prompted many shareholders and advisers to rethink their strategies.

More than half of financial advisers whose clients have assets with Pacific Investment Management — Pimco — are considering pulling assets from the fund firm or are already doing so. That conclusion comes from a new survey of 251 advisers by kasina Advisor Insights in New York. Firms of advisers who were surveyed average assets under management of $67 million.

The survey found that 53% of the advisers are thinking about moving client assets from Pimco or have already.

Also, the survey found that 16% are considering moving assets to Janus Capital Group (NYSE:JNS), where Gross went on leaving Pimco.

And 10% to 15% are still with Pimco, according to a kasina spokeswoman.

Fidelity Investments said that inflow to its bond funds from retail investors, advisers and institutional channels had increased in recent days.

For his new employer, Gross will run $12.9 million Janus Unconstrained Bond Fund .

In a separate report, BNY Mellon unit Standish said that the market impact of Gross’ move was proving to be small.

“There is a lot of chatter in the media about the ‘Pimco Effect’ on fixed-income markets,” the report said. “Our observation is that, after some initial moves on Friday in rates, TIPS, volatility and CDS, there has not been measurable impact in most liquid sectors.”

Standish said that it did observe impact in markets with less liquidity.

“Less liquid sectors such as TIPS continued to weaken as a result of Pimco concerns, but the primary impact is a reluctance on the part of fixed-income investors to commit to areas such as credit and high yield until they see how things shake out.”

Standish urged investors who have longer time horizons to ride out the volatility. “Our view is that short-term dislocations are possible and even likely over the next few months, but this is something that longer-term investors need to look through.”

Aim For Profits 3 Times Bigger Than Losses

To succeed in stocks, aim to have the size of your victories be three times greater than the size of your losses. IBD calls this the 3-to-1 win-loss ratio.

Those who refuse to implement such a profit-and-loss plan can end up giving back substantial gains — especially when the market finally makes a sharp decline.

Experienced CAN SLIM investors know that the best way to make profits and hold onto them is to buy a stock right as it comes out of a base, hold it until the profit rises to 20% to 25%, then lock in the gain.

Do that three times a year with the same position size each time, and your total profit can reach 60% to 75%. If you sell stocks that make a 20% gain and cut your losses at 7%-8%, you can be wrong twice and right once, and still make a profit.

If a stock rises 20% in the first three weeks, you can hold it at least eight weeks in the hope it becomes a long-term winner. This is the sole exception to this sell rule.

On the other hand, a volatile market requires an adjustment. That’s been the case this year and most of last year. Many growth stocks break out of bases but never make a 20% gain before the general market sputters and pulls them down.

In this kind of market, it’s best to modify your profit-and-loss plan. Instead of waiting for a 20% profit that might never come, take profits at 10% to 15%. Cut losses at 3% to 5%. You still get the 3-to-1 profit-to-loss ratio to keep you in the black; you just have to take smaller profits more quickly.

Coach (NYSE:COH), the handbag maker, had been a big winner for more than a decade as it steadily grew sales and earnings. Even after the Great Recession hammered the stock and hurt earnings, Coach rebounded to new highs, and profit growth resumed.

Coach set up a shallow, four-month, double-bottom base in the first half of 2011. The base corrected only 16% from high to low, which is unusual for this pattern.

The stock broke out past 58.38 on April 27. The breakout was tentative; volume was only 18% above average. The next day, the stock followed through nicely as the advance came on higher volume.

But from there, it made little headway for three weeks, although it did form a bullish three-weeks-tight pattern.

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Coke Ekes Out New 52-Week High Despite Stock Sell-Off

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Shale Oil Auction Block Shines Despite Oil’s Decline

While oil prices — pressured by rising supplies, a rising dollar and weak demand — slide to their lowest mark in months, the U.S. energy landscape presents a mixed picture to suitors outside the U.S.

News Monday that Alberta, Can.-based Encana (NYSE:ECA) would pay $7.1 billion to acquire Athlon Energy (NYSE:ATHL) produced one of the week’s big winners: a 25% gain for Athlon shareholders. That followed the prior week’s announcement that Germany’s engineering heavyweight Siemens (OTCPK:SIEGY) would pony up $7.6 billion for Houston-based compressor equipment leader Dresser-Rand (NYSE:DRC). Dresser had been climbing since July on speculation of a deal, and traded on Wednesday 30% above its July 1 price.

But while some non-U.S. companies are moving to take a piece of the maturing shale boom, others — topped by Netherlands-based Royal Dutch Shell (NYSE:RDSA) — are backing out of the space.

Shell spent more than $13 billion on shale-related assets in North America between 2008 and 2012. Those operations continually missed production targets and reported losses. Since late last year, the company sold a large swathe of those assets.

Thomas Tunstall with the University of Texas at San Antonio’s Institute for Economic Development, an authority on the Eagle Ford shale, told IBD “In general, majors have had more difficulty with shale oil and gas. They are used to more capital intensive projects.”

Shale oil and gas development, on the other hand, is very drilling intensive, Tunstall said.

Australia’s BHP Billiton (NYSE:BHP) leapt into the shale fray and spent $20 billion from 2009 to 2011 to acquire assets in the Eagle Ford, Permian Basin and other shale plays. Exxon Mobil (NYSE:XOM) also snapped up shale-centric XTO for a hefty $41 billion in 2009.

An early September report from UBS pointed out that, despite modest capital costs, the global energy industry has seen comparatively little merger and acquisition activity in the past decade. The recent dip in oil prices, combined with a humming U.S. production landscape, could change that picture. UBS named Anadarko Petroleum (NYSE:APC), EOG Resources (NYSE:EOG), Marathon Oil (NYSE:MRO) and Pioneer Natural Resources (NYSE:PXD) as potential targets for large acquirers.

Other analysts said Diamondback Energy (NASDAQ:FANG), Energen (NYSE:EGN) and Parsley Energy (NYSE:PE) were among the smaller players in the target zone.

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Bears Run Wild, Slam Stocks; Put Call Hints At Bottom

The bears ran wild Wednesday as the indexes fell hard in fast trade.
The Nasdaq chopped off 1.6%, while the Dow Jones industrial average and the S&P 500 severed 1.4% and 1.3%, respectively.
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