Wednesday, February 27, 2008

State of the Market - 2/26/08

New day, same story with the stock market today. As has been the recent trend, a weak open along with more dire economic news was quickly bought up and the market rose throughout the morning. After lunchtime, the indexes tried to sell off and did for about an hour, but once again showed resilience and bounced back into the close. The Dow and Nasdaq closed with small gains, while the S&P and Russell 2000 finished with small losses. Volume was lower. Overall, however, this was another productive day in my opinion. After three pretty big up days, as well as a rather poor economic picture being painted by Bernanke in front of Congress, the afternoon sell-off had every reason to expand into something major. But it didn’t, and I think that’s key. There seems to be a genuine change in sentiment, and buyers have stepped up here to buy weakness. That doesn’t mean we can’t still selloff, or that we will continue higher from here. But based on the recent action, it looks like the trend is still up and like it will continue to be up for the near future.

I hear (read) a lot of people that sound totally perplexed as to why the market is rallying here in the face of such dire economic news. On the front page of Yahoo Finance, the following headlines are front and center: “Oil at record high of $102 a barrel”, "Dollar falls to new low against the Euro”, “New home sales drop for 3rd straight month”. Ben Bernanke talks to Congress and basically says our economy is slowing, the housing market is still deteriorating, and while all of this is happening, inflation continues to rise. It really doesn’t make any sense from a rational perspective why this market is going up. Believe me – I am personally having lots of trouble understanding it, as well. A big part of me still expects this to all fall apart at some point in the next few months. It is, however, very important to remember that it doesn’t really matter if it makes sense or not. The only thing that matters is that the market is going up. You can either get on for the ride, however long it might last, or you can sit and try to decide why this is happening. By the time you have everything figured out, the rally will be over and you will have missed the entire thing. Worrying about or trying to figure out the “why” can cost you a lot of money in the market. The reason behind this will come out in due time. The only opinion that really matters in the stock market is the one owned by Mr. Market himself. That’s the one you need to pay attention to and follow, not your own.

From a technical perspective, the Dow is right arount its 50 day moving average and still has to contend with strong resistance around 12770. The small caps are also right near their 50 day moving average and are closing in on the same type of resistance (the old high) that the Dow is facing. The S&P 500 is still below the 50 day moving average and has some resistance around 1400 to deal with, but today’s action was still positive. My only concern technically is that the Nasdaq is still lagging behind these other indexes, and if this is going to be anything more than a short-term rally, I think the Nasdaq has to participate. That is where the new leaders that can make big moves are going to come from. Perhaps the small caps looking OK outweighs this concern, because most of the Nasdaq’s big names(AAPL, GOOG, RIMM, GRMN, BIDU, MSFT) are not names I really worry about – all are former leaders and broken leaders. It still wouldn’t surprise me to see the indexes pull back here for a few days before trying to bust through the aforementioned resistance levels. I think it would actually be preferable to do that – it would give some better entry points on some of the recent breakouts. Days like today, which I would consider consolidation, would be very good.

I am still in the three positions I started yesterday but I don’t like the way CREE acted today. I know the market opened weakly, but if this stock is going to make a big move, then it should have followed-through on its breakout yesterday. It didn’t, which raises a bit of concern for me, but it held short-term support so I will give it more time. Not a ton of new stocks that I am looking at here but if we continue to consolidate here, more will appear. There are a lot of stocks that just need to rest a bit, and if they do, they will make nice longs, particularly in the commodity sector. These have just gone too far too fast for me to be entering around here. Big Ben has his second day of testimony tomorrow, so be careful. You never know how the market will react to what he says, but as of now, things continue to look good. Let’s hope it continues. Good luck.

Stocks to add to watchlist: VSNT, ITU, BRKR, GFA, SQM, TKC

Stocks that could be buyable: CMED(pulled back to breakout point), PCLN(little flag pattern)


Stock Speculator said...

The developments in CREE aren't really surprising, just from the chart it appears to be a faulty base, it broke the 200MA a few times at its bottom: not showing firm support from institutions. DROOY is a better example of what you'd like to see a stock do at its 200MA when forming an uptrend. And the deepness of the correction in the cup(40%) is a bit higher than the 35% maximum successful bases have made. Also in a poor performing group (144th of 196).

But there have been some high quality stocks breaking out bases: AUY, CRZO, GGB.

Mac said...

CREE is not a perfect base - there are very few right now out there - but it does have a lot of positive accumulation in the base. The indicators I use for Telechart, namely the BOP, show much strength in the base, even though it may be a little choppy. We'll see if it works out - if I am stopped out, so be it. I got in around $33.50, so I am still ok.

Out of the stocks you mentioned, I like GGB and AUY, but also don't like chasing stocks, so I will look to get in possibly on pullbacks to the breakout point. It is hard to argue that these commodities have already had a huge run and are due to pullback. I don't want to be caught buying before that pullback.