Tuesday, January 1, 2008

State of the Market - 1/1/2008

All indexes were down Monday and on higher volume - however the volume because of the holiday environment was well below average. IBD is showing five distribution days for the Nasdaq and 4 for the S&P 500 and the Dow. My market monitor continues to be in bearish territory. The new Investors Intelligence survey has not been released yet - however, the Blogger Sentiment Poll shows 48% bulls versus 30% bears. The last I.I. survey had bulls at 55% and bears at 23%. All of these factors have me seeing a market that is weak and has a good chance to get weaker. Below are charts of the S&P 500 and Nasdaq with some notes.

S&P 500

Nasdaq
Charts from Telechart2007, courtesy of Worden Brothers, Inc.

With all stock indexes that I follow being below their 50 day moving averages (and all except for the Nasdaq and the QQQQ's also under their 200 day moving averages), I don't see this being a prime spot to be starting new long positions. There are a number of strong stocks out there like RICK, SDTH, SVNT, MELI, ULBI, VSNT, and of course the solars that continue to hold up after huge runs. However, all of these stocks are extremely extended after having powerful moves over the past month, so I think it would be quite unwise to even think of entering any of these stocks right now. If the market does continue to get weaker here, perhaps these stocks(if we're lucky) will rest in a calm manner for a month or so, putting them is much less riskier positions to buy some. That is what I am hoping for.

As of now, I have a few short positions and am looking more toward that side of the market for trades. Since we have been down two of the last three days, shorting here is probably a bit more risky, especially because the first days of the trading year tend to be pretty volatile. No one knows for sure how the year will start off, and you don't want to put yourself in position to take some quick losses right off the bat. I have two charts below (NOV and DSX) that I am watching as possible shorts but you must wait for the right opportunity to arise before entering. William O'Neil describes in his book why shorting is so difficult - it is because safe entries are very hard to find.

NOV

DSX
Charts from Telechart2007, courtesy of Worden Brothers, Inc.

One thing to mention about shorts is that it is very important to take your profits much quicker than with longs. It is much harder to ride a short all the way down because of the quick, powerful rallies even weak stocks can have that can cost you much of your profit. I usually try to take at least some of my profits (sometimes all of them) around 10%. I took a short a few days ago that quickly went down 10%, but because of the year end and wanting to take the profit in the 2008 tax year, I did not cover at all, and that stock rallied a quick 5% back on Monday. I still think it is in OK shape but in general I think it is better to take quick profits on shorts.

Good luck in the new year! I don't know what is going to happen these first few days, but I am going to try and sit on my hands for the first few days here and just manage positions while the market decides what it wants to do.

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