Monday, February 25, 2008

State of the Market - 2/25/08

Another pretty typical day in the market today as stocks went up strongly in the morning only to be sold off by midday as has been the pattern the past few weeks. Then news of bond insurers MBIA and Ambac having their credit ratings reaffirmed by Standard and Poors sent the market back up in a hurry. The indexes closed strong and it looks like at least the Dow and S&P 500 may have broken out of their recent ranges. Thank goodness everything is perfect again in the financial world – that is a big relief. I am sure all of the problems we have heard about for the past few months are nothing more than water under the bridge now. Whatever. We go from one day having rumors of eight major banks stepping in with a huge bailout of these insurers due to all of their problems, to the next day having these insurers being seen as perfectly fine by a major credit agency. This just all sounds way too fishy for me and my cynical side tells me that this is simply an attempt to raise these financials stocks up one last time so that the big boys can hand them off to the unknowing retail investors before the really bad news hits. There seems to be a lot of shady stuff going on right now. Just my opinion.

Daytraders must be absolutely loving this market. I have only be trading for 3 or 4 years, but I can never remember a time that there were so many wild swings intraday. The Dow and S&P 500 finally closed above their 20 day moving average, which is very good to see. However, the Nasdaq is still below its 20 day moving average, and the small caps are still below recent resistance and haven’t broken out yet, so things are exactly perfect. But today’s action is definitely good for the bulls and makes me more willing to take positions in some longs. Bad news is not exactly being sold off hard so even if we get a high CPI number tomorrow, I don’t know what the market’s reaction will be. I am not jumping in with both feet, but if an opportunity arises that looks good, I will likely begin trying some of these.

One blog I follow is Stockbee. I have mentioned some of his techniques before on this blog and I have learned a tremendous amount from the blog over the past two years. Because of this, I really respect his comments about the market and from what I have seen, he is usually very accurate with his market calls. So when he states this morning that he feels “the worst is most probably behind us” and “most probably we are putting in a bottom”, I pay attention. I don’t necessarily agree from a longer-term perspective, but I am at least going to keep my mind open to that possibility right now. I still see a lot of problems out there, but my shorts haven’t been working out very well at all recently, so that should tell me something. Gradually, more nice charts are starting to show up, although not an overwhelming amount. The news is awfully bad out there, and they always say that news is worst at the bottom. Today’s action was good, and if I see more constructive action, I will continue to feel more comfortable going long. If indeed the worst is behind us, then selling short will not likely be very profitable. I don’t know how far we go – I really don’t believe this is the start of a new bull market – but it is possible for us to rally higher. There is a lot of money on the sidelines so momentum could build if we get more strength right here.

These are the times that trading is hard because I have been bearish and continue to be bearish for the longer-term, but I also want to make money, so I can't let my ego get in the way here if we do rally higher. Being stubborn is stupid as a trader and can lead to major losses. The market monitor, according to my scans, went bullish today, so that is another signal I look for in terms of going long. The IBD follow-through day is still technically in tact. As of now, I plan on slowly entering into some positions that look good and seeing if the market does confirm today's action. If it does, that is great. Making money on the long side is much easier than making it on the short side, so I won't complain. I don't like to be bearish, but most of the things I saw pointed me that way so far this year. I am now seeing more signals pointing bullish so I have to acknowledge them without my personal feeling getting in the way. My ego is really the only thing that makes that difficult - admitting I may have been wrong is hard, but necessary if I am going to be successful as a trader.

Main things to focus on the next day or so will be follow-through and if the Nasdaq catches up with the S&P 500. If we are going to have a meaningful rally, we should get nice gains the next few days. If we don't, then I will be back to being bearish. Just remember we're not out of the woods yet. I will be back later with a few charts that I am watching - some new ones are popping up.


Pradeep Bonde said...

Look at scan like 85 plus eps, 85 plus rel strength and sector in top 40, and volume up 50% or more over 50 day average volume. You would see lot of new leaders. FCSX, CEL, TNH, VIVO and many others look to be emerging new leaders.

Mac said...

I agree Pradeep - there are more popping up. It has just been such a slow development that I think this will likely be a shorter-term rally rather than a completely new bull market. The IBD component of me keeps saying that commodities are not the type of leaders that produce a huge market run, especially when they have run so far already. But you have to be prepared for anything, so I am ready to go long in some of the new stocks popping up. We'll just play the rally for as long as it goes. Thanks for your comment.